What I'm Thinking and
Thankfully, this year is rapidly
drawing to a close, and it can't do so fast enough for me as it's
been a very difficult year on so many levels. In my 20 years in this
business I can't remember another year with such month-to-month,
day-to-day, or even intraday volatility in the stock market. I don't
think we've ever had such strong links between domestic and
international markets, and virtually all asset classes, as local
political, economic or even meteorological events ripple to every
corner of the globe with lightning speed. This means that world
markets are increasingly correlated (meaning that they go up or down
together), making it very difficult for investors to find an edge.
Indeed, more and more the markets move in an inverse relationship to
the dollar: if the dollar goes up, the market goes down,and vice
versa. It will be a great thing for investors when that link is
broken and the markets again move according to corporate
The good news is that in spite of
all the bad news and the crazy volatility, the bottom set on October
3 has held, as you can see below. Indeed, that low hasn't even been
approached. I've written for a couple of months that I remain
guardedly optimistic and I remain so as the economic picture
continues to improve, albeit very slowly. Longer term I am very
concerned about the global political and debt situation. But I'll
cover that in greater depth in the coming months.
I think the chart of the Dow Jones Industrial
Average paints a very interesting picture. The Dow had a great run
in October, breaking through resistance before closing at 12,284.
The inevitable selloff wasn't too bad and the subsequent recovery
ended just below resistance at that high of 12,284. The index now
sits just north of an intermediate support level around 11,750
(green line). The key for the Dow will be to hold above that support
and break through resistance to a new high above 12,284. If that can
happen, then the general upward trend should continue.
The chart of the transportation
average looks very similar to the industrial average. The index has
managed to remain above support at 4,800 (green line). The key here
would be to remain above 4,800 while piercing resistance at 5,076 to
establish a new high concurrent with a similar move to a new high by
the Industrials. This would be a bull market signal according to Dow
For the past couple of months I've
included the chart of the Dow Jones Utility average to demonstrate a
major bull market in the utility sector. Very quietly, and with
almost no coverage in the media, utilities have traded up to
multi-year highs not seen since before the failure of Lehman
Brothers. Utilities love a low interest rate environment, and
investors crave their above average dividend yields, so I would
expect the good times to continue in this sector. Yet they've backed
off a bit recently, but still remain just above the 50-day moving
average. Besides, a little weakness provides investors with a buying
Thanks to the easy money policy
directives of Ben Bernanke and the rest of the members of the Board
of the Federal Reserve, Treasury yields will remain artificially low
for an extended period of time. 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%.
Concurrently, as investors continue to buy US Treasuries seeking a
safe haven from global economic uncertainties, the resulting buying
pressure forces yields even lower. Nothing in the current
environment suggests that I should change my prediction that yields
will generally remain between 2%-3% through at least the end of 2012
before slowly rising, as market forces dictate they eventually must.
There is a limit to how long the Fed will be able to keep expanding
their balance sheet before they're forced to stop buying treasury
and agency bonds. At that point, rates will move higher. But for
now, don't fight the Fed.
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, with the exception of the MSCI EAFE, were basically flat
after a huge rally the prior month. Was it simply a little pause
before we finish with a "Santa Claus Rally" or does it portend
concern concern for the end of the year? Earlier this month my hunch
was that the market would finish the year on a positive note, thanks
to better than expected retail sales and a slowly improving
employment picture. Now it's a bit harder to say, but I still think
we'll finish the year with a rally to end the year in the
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
December 10 was 366,000, a decrease of 19,000 from the prior
week's revised figure. This was the lowest weekly figure since
July 2008. The four-week average of 387,750 continued the overall
trend of moving slightly lower. About 3.6 million people continue
to collect unemployment insurance, which was roughly similar to
the prior month.
- Non-farm payroll employment increased by a reasonably solid
120,000 in November, with 140,000 gains in the private sector
offset by 20,000 losses in government jobs. And if the current
trend continues, that number will be revised higher in subsequent
months. The largest gains occurred in retail (getting ready for
the holidays), leisure and hospitality and health care. 72,000
jobs were added in the prior two months thanks to upward revisions
to the September and October figures. The total number of workers
counted as unemployed dropped to 13.3 million, helping move the
unemployment rate down to 8.6%. The more comprehensive U-6 rate,
which was as high as 16.7% in June, moved down to 15.0%.
- A slightly lower 5.7 million people continued to be unemployed
longer than 27 weeks. The seasonally adjusted number of people who
could only find part-time work fell to 8.5 million and the number
of marginally attached workers held at 2.6 million. The number of
people holding multiple jobs inched up to 7.08 million. The
average hourly wages for blue collar workers inched up to $19.54
while the average work week slipped back to 33.6 hours. So
overall, while this report showed decent improvement, wages and
hours worked remain stagnant; so it's two steps forward and one
- The Congressional Budget Office (CBO) estimated that on a net
present value basis, the Treasury reported a federal budget
deficit of $139 billion for the November and $237 billion for the
first two months of fiscal 2012, which was more than $50 billion
less than last year.
- The Census Bureau reported that the U.S. had a trade deficit
in goods and services of $43.5 billion in October, down from the
revised higher figure in September. With the exception of
particularly high levels in May and June, the deficit has remained
relatively stable this year.
- The Census Bureau reported that privately owned housing
starts remained flat in October, after increasing by a revised
lower 7.7% in September, but was 16.5% higher than a year ago, to
a seasonally adjusted annual rate of 628,000 units. The monthly
results continue to fluctuate wildly from month to month, so a
reliable trend is not yet in evidence. New building permits
were up 10.9% from the prior month and 17.7% from last year. Like
starts, the number of permits are fluctuating wildly from month to
month, so no discernable trend is yet in evidence.
- The National Association of Homebuilders/Wells Fargo
Confidence Index in October rose to 20 from 17 in September,
marking the highest level since May 2010. While these are still
very low numbers, we now have two months of solid increases; let's
hope this continues for the rest of the year.
- The Census Bureau reported that on a seasonally adjusted
annualized basis, sales of new homes in October rose 1.3%,
and at 303,000 units, sales were actually 8.9% higher than the
depressed level of a year ago. The estimate of homes for sale was
only 162,000, which represents 6.3 months at the current rate of
sales. The median sales price of $212,300 marked the fifth
straight month of lower prices, and was well below the 12-month
moving average price of $225,108. While the rising number of home
sales is good news, and probably due in part to the better weather
and ever cheaper prices, the falling average sales price continues
to be worrisome.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes were 1.4% higher in October to 4.97 million units, and
were 13.5% higher than a year ago. The estimate of homes for sale,
at 3.3 million represents 8.0 months of supply at the current rate
of sales. The median sales price of $162,500 is slightly lower
than the 12-month average of $165,792. With mortgage rates at
historically low levels, and prices as cheap as they've been for
years, this is a great time to buy a home if you have cash, good
credit, can find someone willing to sell and take out a conforming
loan. If you want a jumbo mortgage, you're basically out of luck.
- 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, slipped a bit in September, breaking the
five month streak of improving prices. So much for the upward
trend I talked about last month. But it does make sense
considering the falling home prices reported by the Census Bureau
and the National Association of Realtors. My guess is that next
month won't be much better.
- 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 52.7 in November. This marks
twenty-eight consecutive months of expansion in the manufacturing
sector, and a slight improvement over the prior month. The ISM
index of non-manufacturing activity was 52.0. This marks growth in
the service sector for twenty-three 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 0.9% in October, a large
increase versus prior months. Says Ataman Ozyildirim, economist at
The Conference Board: "The October rebound of the LEI largely due
to the sharp pick-up in housing permits suggests that the risk of
an economic downturn has receded. Improving consumer expectations,
stock markets, and labor market indicators also contributed to
this months gain in the LEI as did the continuing positive
contributions from the interest rate spread."
- According to the Bureau of Economic Analysis, the "second"
estimate of GDP growth in Q3 was 2.0%, down from the "advance"
estimate of 2.5%. This mediocre numbers follows a weak Q2 GDP
growth of 1.3% and the putrid Q1 GDP growth of 0.4%. This compares
with 2.3% in Q4, 2.5% in Q3, 3.8% in Q2 and 3.9% in Q1 of 2010.
The evidence would suggest that while (at least for now) we have
avoided the "double-dip recession", the economy continues to
- The Federal Reserve reported that in October the amount of
outstanding consumer credit was $2.45, basically unchanged from
the prior month. Consumer credit has expanded slightly since the
beginning of the year, which seems to be helping retail sales a
bit, at least until this past month.
- According to the Census Bureau, retail trade and food service
sales were up only 0.2% in November, and were 6.7% higher than a
year ago. This was the weakest monthly figure since May.
Electronics and appliances, non-store retailers and motor vehicles
had the biggest gains.
- The Federal Reserve reported that in October the supply of M-2
(a broader view of money) continued to explode higher, up a
stunning 14.5% over the prior six months. The supply of M-1 (the
most narrow definition of money), on the other hand, rose a
whopping 26.6% over the same six months. Where is all this money
going, other than to the reserves at your local bank or sitting on
the balance sheet of the Fed? It seems clear to me that this
subtle and dangerous policy of monetary expansion is doing little
good to the economy but will likely do much greater harm in the
- After plunging in October, the Conference Board's Consumer
Confidence Index recovered a bit in November, rising from 40.9 to
56.8, similar to levels last seen over the summer. Still, 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, 88 banks had failed through December 15
and improvement over last year as a record 160 banks were either
closed or merged into healthier banks in 2010, versus 140 in 2009.
By comparison, only 26 failed in 2008 and a paltry 3 in
The value of the dollar is
probably the most important factor determining the direction of our
stock market today. If the dollar goes up, the market goes down, and
vice versa. Almost all sectors trade down when the dollar rises. The
rise in the dollar has especially hurt the relative value of hard
assets like gold, copper and iron ore. And again, this is not a
statement about the absolute health of the greenback, but rather a
comment on the relatively dismal status of many other currencies,
especially the Euro. The big question is how far the dollar can rise
and honestly, I don't have an answer.
This is a very interesting and
important moment for gold investors. The price of gold has fallen
below both the 50-day and 200-day moving averages, and below the
rising trendline. For some, this is time to panic and sell. For
others, like me, this will create a profitable buying opportunity.
Barring a huge drop in the last two weeks, 2011 will mark the 11th
consecutive year in which the price of gold increased on a
year-over-year basis. Can you name any other asset class that can
make the same claim? And I'm confident that the trend will continue
next year as the global debt problems and political uncertainty will
persist for the foreseeable future.
The recent losses in silver are
even greater than the losses in gold. The 200-day moving average has
moved above the 50-day average, which is very ominous. If the price
of silver falls significantly below support around 28 I'll begin to
get worried as I'm bullish, and long, on silver. I'm still convinced
that over the next twelve to twenty-four months silver will
appreciate, and will likely outperform gold. But in the short-term,
it could be a very bumpy ride.
The recent action of the price of
copper offer a bit of relief from the misery of the past few months.
The almost unrelentingly downward action on the price of copper
certainly confirmed the weak global economy this year. Could it be
that Dr. Copper now forecasts a bit of recovery, or is this just a
Dead Cat Bounce? It would be bullish if the price can break above
resistance around $3.70 or so, and if the 50-day moving average
could move above the 200-day. I don't expect either to happen before
the end of the year, but it would be very bullish if it happens in
the first quarter.
The price of West Texas Crude had
exploded higher over the past two months, rising back above
$100/barrel, before being pummeled in the last couple of days. As
such, we're at an interesting inflection point with the current
price and both moving averages converging. A little profit-taking
and consolidation is normal after such a brief and powerful rally.
It will be very important for the bulls for the price to remain
above $90/barrel then eventually move back towards $100. For now,
remaining in the upward moving green channel is bullish.
I've written about my bearishness
on the financial sector every month since early 2008, and nothing
this year has even come close to changing my mind. As you can see,
the rally in October quickly evaporated in November. The index is
once again trading back below the key support/resistance at 13. It's
hard to imagine any substantial and prolonged gains in the banking
sector until the world solves its various debt crises and the US
fixes its housing mess. Good luck with that.
I have been equally bearish on the
housing sector since 2007, so I wasn't astonished that the price of
the index fell steadily (in fact I predicted it) before inevitably
breaking below major support around 86. What has surprised me is how
powerful the rally has been over the two months. While I have
documented the (very) modest gains in some of the housing metrics,
and those gains are only relative to unmitigated misery, I suppose
they have offered some hope for a recovery in this beleaguered
sector. So the question is whether this is a real and sustained
recovery, or simply another false rally presaging another calamitous
fall. I'm keeping my money on the sidelines.
The equity markets of the
developed international countries, not surprisingly, have taken a
beating the second of the this year. The good news is that support
held around 46. The bad news is that the current price remains below
both moving averages. It's still an ugly chart, but it could have
been worse. Like many other charts, just consolidating for a bit,
without weakening further, would be very constructive. A prolonged
rally above $54, which looks to be the next level of resistance,
would be bullish. But it's hard to imagine any sustained rally until
the ECU is on more stable footing. In the meantime, watch that floor
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. If we don't get growth here, where will the growth come
from? The US perhaps? That would turn convention on its ear a bit.
In the meantime, watch to see if support holds around 35, or if the
price can move above the 50-day average and back over 40.
I've been writing for about six
months that the weakness in the Shanghai Index makes me very nervous
because of China's importance to the world economy. In July the
index fell below its moving averages and a year old support level.
Then after testing it in early October, the index recently sunk
below a major support level last week to fall to a level not seen
since the Lehman failure when it bottomed out at 1,665. This is not
good at all, and could have huge implications the stock markets
around the world. RSI is extremely oversold which suggests that a
short-term pop should be upcoming, and let's hope so. The Chinese
market needs to turn around before it drags the rest of the world
down with it.
This month, with the NYSE Bullish
Percent Index around 50, the market is neither overly bullish nor
bearish, so there's no easy trade suggested here. And given the way
the market is trading in a range right now, that isn't surprising.
With only two weeks left in the year, and vacations upcoming, I
don't expect any major moves between now and the end of the
This chart too, which shows the
percentage of stocks traded on the New York Stock Exchange that are
trading above their 50-day moving average suggests a certain amount
of equanimity, with no easy trade to be extrapolated. Again, it
appears that the market is ready to move somewhat quietly towards
the end of the year.
Finally we have the somewhat busy
chart of the "Fear Index". One might expect that after all the
political, economic and meteorological crises we've endured this
year, a few of which are noted below, the VIX would be deep in
the fear area, rather than smack in the middle of the normal range.
How is it that the VIX is "only" at 24, rather than 44? Has the VIX
discounted all the bad news and is it forecasting better things to
come, or are market participants simply way to complacent? We'll
know more in 2012.
What I'm Thinking
I'm going to keep it short and
sweet this month so as to save some powder for my "Fearless
Forecasts" edition next month. Suffice it to say that the global
economic malaise, debt crisis and political uncertainty continue to
produce an exceedingly difficult and unsettled investment landscape.
The market appears to be trading almost entirely on news and
sentiment rather than on fundamentals. In addition, asset classes
are growing more and more correlated as markets uniformly move up
and down together on the news of the day. This makes it harder for
investors to find an edge. I don't know how long this broad
correlation will last, but it cannot last forever. So, for now, I'm
sticking with the sector-based investment philosophy that has served
my investors well over the last decade.
It's been very busy over the last
four or five weeks as I've completed a detailed review and analysis
of every account that I manage. As a result,
I've sold a number of underperforming securities, taken tax losses
where needed and added to core positions with the cash raised from
the sales. I've now almost completed this process of tweaking every
account. By the end of next week every account will be ready for
year-end and positioned in the best possible way for 2012.
Last weekend I hosted my first
ever Client Appreciation and Holiday Party. I think it was a smash
success as everyone enjoyed delicious catered food and wonderful
French wines courtesy of my friends at Voix de la Terre (www.vdlt.com). Clients,
prospects, business contacts and personal friends all enjoyed a
wonderful evening and made, or renewed, some great connections. I'm
already looking forward to the next event, which will hopefully be
early next summer. The following montage should give you a flavor
for the evening. More pictures have been uploaded to WAM's fan page
on Facebook soon so please look for them.
Speaking of Facebook, 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.
As I only have about 280 followers, it doesn't look like I'll hit my
goal of 300 by year-end, but you never know. So if you use Twitter,
please consider following me, and ask your colleagues, friends and
family members to do the same.
Next month, as is the case every
January, I'll be sharing with you my Fearless Forecasts for the new
year and grading the accuracy of my predictions from last year. It's
always interesting to see how my prognostications panned out. I
expect that it'll be a mixed bag this year given how unpredictable
and volatile things have been in 2011. But be sure to tune in next
month to found out exactly how I did.
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