Staring Over The Cliff
Current Market Analysis
Statistics to Watch
Trends To Watch
What I'm Thinking
Professional News and Notes
Current Market Analysis
market finished trading for the week, the Dow Jones Industrial Average stood at 13,135, up 547
points, or 4.3%, from when I wrote to you last month,
and only about 3.5% from the October 5 closing high of 13,610. The market
has managed to recover all of its losses since the election. Given
all of the problems we're facing, not the least of which is the
looming Fiscal Cliff, it's amazing that the market is doing as well as it is. Should there be a timely
resolution to this impasse, the market could quickly soar to new
highs. If not, it could just as easily plunge to fresh lows.
Choosing which outcome to bet on is the big dilemma facing investors today.
The DJIA has reached the current price five times
since May, only once breaking through to a higher level (in
September and October). For the next few weeks, at
least through the end of the year, I expect it will
be a news driven market,
swinging wildly on lower holiday volume as news breaks one way
or another about the Cliff negotiations. Right now, the chart appears
mildly bullish with the price higher than both moving averages. Clearly a break
above 13,330 is needed before the DJIA can attempt to surpass
the October highs. There is strong downside support around 12,600
What a difference a month
makes for the beleaguered transportation average. It has surged from
strong support just below 4,900 to attack resistance around
5,250. This has been a firm trading range for the past eight
months. It's unlikely the broader market can move to new highs if the
DJTA doesn't break above this resistance level. We'll see
if the current momentum can continue.
Last month I suggested that the sudden
drop in the Dow Jones Utility Average could be a nice buying opportunity. The
DJUA fell a surprising 13% in less than four months, which seemed
like an overreaction to me. Since then, the average
has gained about 3.2%. While it's a negative that the 50-day moving average has
crossed below the 200-day. The good news is that RSI has
recovered from its oversold position. Is this the beginning of a
broader recovery or a "suckers rally"? Only time will tell, but I
still like this sector.
Interest rates continue
to trade between 1.4% - 1.9% in the "New Normal" orchestrated
by Ben Bernanke and the Federal Reserve. Chairman Bernanke has
pledged to keep rates artificially low at least through 2015, or
until inflation rises above 2.5%. The current rate increase
coincides with the rise in equities, as investors have
taken money out of the safe haven of treasuries and moved it
into riskier assets like stocks. It would be ironic if the
very asset bubble created by the Fed helps drive interest rates
higher than their target levels.
Last Month's Results
I provide the following chart to show the raw results for
the preceding month, the quarter-to-date and the year-to-date. After a desultory
beginning to the month, the sharp recovery helped
propel the broad averages to slim gains in November. Riskier growth and
technology stocks, which led the earlier decline, were the vanguard of the recovery.
Barring a big decline in the last two weeks of the year, some
stock investors will enjoy double digit gains this year, depending on the
mix of their assets. It has been a crazy roller coaster of a
ride this year, once again proving the importance of a firm hand on
the steering wheel.
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 8 was 343,000, a decrease of 29,000 from
the prior week's revised figure. The four-week average of 381,500
is about 2,000 lower than the prior month's tally. About 3.2 million
people continue to collect unemployment insurance, down over 100,000 from
the prior month. I just wonder if this is seasonal employment that will be
reversed after the holidays.
- Non-farm payroll employment in November continued
to show jagged improvement, but remained a mixed
bag. The establishment survey reported that 146,000 jobs were added in the
month while the household survey said that the unemployment rate dropped to 7.7%. The
jobs added this month were slightly lower than the average of 151,000 for
the year, which in itself is slightly lower than the average of 153,000
for jobs added in 2011. The unemployment rate is the
lowest since January 2009.
- Revisions to September and October subtracted 49,000 jobs,
after adding them back the prior two months. It's hard to say
what the likely direction of revisions will be in the December
report. The downward revisions were a surprise. The total number of workers counted
as unemployed fell to 12.0 million, which helped lower the unemployment rate. The labor
force participation rate fell back to 63.6%. The more comprehensive U-6
"underemployment" rate dipped to 14.4%.
- 4.8 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 8.2 million and the number of marginally attached
workers inched up to 2.5 million. The number of people holding multiple jobs
moved up to 7.2 million. The average hourly wages for blue collar workers
rose slightly to $19.84 while the average work week rose to 33.7 hours.
Overall, this was a modestly good report, but much more is needed.
- The Congressional Budget Office (CBO)
estimated that on a net present value basis, the Treasury reported
a federal budget deficit of $172 billion in November, and $292 billion for
the first two months of the fiscal year, which is $57 billion
more than the same period of fiscal 2012. They claim that without shifts in the
timing of certain payments each year, the deficit would have
been about $8 billion lower this year. With numbers this large,
that's basically a rounding error. Either way, we're headed for another year
of $1 trillion deficits.
- The Census Bureau reported that the U.S. trade deficit of
goods and services was $42.2 billion in October, up from $40.3 in August.
The trade gap was $52.5 billion in January, so real, if unsteady progress, has been made.
- The Census Bureau reported that privately owned housing
starts increased 3.6% in October, building on the 15.1% gain in September. Housing
starts are now a whopping 41.9% higher than a year ago, to a seasonally adjusted annual rate of 894,000
units. New building permits were down a slight 2.76% after the enormous increase
the prior month, but still 29.8% higher than the year before.
This is a strong sign that the recovery in housing is continuing.
- The National Association of
Homebuilders/Wells Fargo Confidence Index gained 5 points in November to 46. That
marks the seventh straight monthly increase and is the highest level
since May 2006. Builder confidence is slowly approaching a healthy figure of 50, which is
considerable progress from the desultory figure of 19 only one year ago.
- The Census Bureau reported that on a
seasonally adjusted annualized basis, 368,000 new homes
were sold in October, roughly the same as the revised
figure for September but still 17.2% better than a year ago. The
estimate of homes for sale was 147,000, which represents only 4.8 months
at the current rate of sales. The median sales price dipped this month
to $237,700, which remains just above the rising 12-month moving average price
of $234,967. The new home sale market remains very tight, which
augurs well for future price increases. Just remember we've hit the seasonally
weak time of year.
- The National Association of Realtors reported that on a
seasonally adjusted annualized basis, sales of existing
homes were 2.1% higher in October than a revised lower tally for September, to 4.79
million units, and remained 10.9% higher than a year ago. The estimate
of 2.14 million homes for sale means there's only an estimated 5.4
months supply on the market. The median sales price
rose a smidge to $178,600, which is above the rising 12-month
average of $172,758. As with new homes, the existing home
market is getting tighter and tighter, which suggests a bright future in
- The S&P/Case-Shiller Home
Price 10-city index, which uses a three-month moving average to
track the value of home prices across the US, rose for the sixth
straight month in September, posting a modest 0.3% increase. Prices nationwide
were up 3.6% in the third quarter.
- The Institute for Supply Management (ISM) index of
manufacturing activity was 49.5 in November, showing that economic activity in the manufacturing
sector contracted for the fourth time in the last six months. The
service sector, on the other hand, shows no sign
of slowing down. The ISM index of non-manufacturing activity was 54.7,
up a bit from October, which marked growth in the service
sector for 35 consecutive months.
- The Conference Board reported that it's
index of Leading Economic Indicators increased by 0.5% in October
after an increase of 0.5% in September. Says Ataman Ozyildirim,
economist at The Conference Board: "The
U.S. LEI increased slightly in October, the second consecutive
increase. The LEI still points to modestly expanding economic
activity in the near term. Over the last six months,
improvements in the residential construction and financial
components of the LEI have offset weak consumer expectations,
manufacturing new orders and labor market components."
- According to the Bureau of
Economic Analysis, the "second" estimate of GDP growth for Q3 2012 was 2.7%, up
from the advance estimate of 2.0% and better than the 1.3%
growth in Q2 and 2.0% in Q1. Unfortunately, it's still less than the 3% recorded
in Q4 2011. We should enjoy whatever growth we can get this year as things could turn ugly
quickly in 2013 if all, or part, of the Fiscal Cliff comes to pass.
- The Federal Reserve reported that in
September the amount of outstanding consumer credit was $2.75 trillion, up from the
prior month and growing at a 6.25% annualized rate. A
third straight month of growth in consumer credit can only be helpful to
retail sales, which would boost the economy.
- According to the Census Bureau, retail trade and food service sales increased
0.3% in October, following a 1.1% increase in September, leaving them 3.7% higher than
a year ago. Electronics, autos and building materials sales led the
way. More important is what happens in November and December during the
holiday shopping season, which is the make or break time for many retailers.
- The Federal Reserve reported that in
November the six month rate of growth in the supply of M-2 (a
broader view of money) was 7.7%, up a bit from October. The supply of M-1 (a narrower definition of
money), on the other hand, rose a much faster 13.6%. The Fed continues
to create a seemingly endless supply of money in an effort to boost
the economy. And while it may be helping modestly in the
short run, it is likely doing serious damage in the long run.
- The Conference Board's Consumer
Confidence Index increased again in November, rising from 73.1
to 73.7. Says Lynn Franco, Director of The Conference Board
Consumer Research Center: "The
Consumer Confidence Index increased in November and is now at its
highest level in more than four and a half years (76.4 Feb. 2008).
This month’s moderate improvement was the result of an uptick in
expectations, while consumers’ assessment of present-day
conditions continues to hold steady. Over the past few
months, consumers have grown increasingly more upbeat about the
current and expected state of the job market, and this turnaround
in sentiment is helping to boost confidence."
- According to the FDIC, only 3 banks
failed in November, bringing the total number of bank failures so
far this year to 05, which is 40 less than this time last
year. Clearly there will be far fewer bank failures this year
than the 92 banks that failed in 2011, which was a big improvement
over the record 160 banks that were either closed or merged into
healthier banks in 2010, and 140 in 2009. By comparison, only 26
failed in 2008 and a negligible 3 in 2007. It's likely that only a
dozen or so will fail next year.
The dollar index has
traded in a relatively narrow range (between the blue and dotted red lines) for the
past year. It recently moved lower,
dropping below both moving averages. The current action suggests it may again test support just
below 79. This would likely be a boom to equity and commodity
For the past year the trading range for gold has
been between $1,500 - $1,800/oz. During this period, the price has
often found interim support or resistance around 1,675 (green dotted line), and it
appears that now is another one of those times. I'll reiterate
that I think the green line likely offers a great
entry point for those seeking to build a position in the yellow
Copper has staged an incredible
recovery over the past month after looking very sickly in October.
Dr. Copper is again forecasting better economic times ahead. After
falling below the interim support/resistance line at $3.50 (green
dotted line) it's moved above both moving averages. The falling MACD
suggests that the current rally may be a bit long in the tooth.
We'll have to keep a close eye on this.
The chart of the price of West
Texas crude looks pretty dismal as it has fallen well below interim
support and both moving averages. The weakness is likely a
reflection of lower global consumption and increased domestic
supply. The dramatic increase in natural gas supplies isn't helping
either. I think the price will likely move lower before moving
higher again next year.
The financial index has failed once again (at
least for now) to breach resistance at $16.30. The financial sector
is facing some head winds due to an unintended consequence of QE
whereby banks see their net interest margin, which is the difference between their borrowing and lending costs, get squeezed, which
negatively impacts earnings. So I'm going to maintain my stubborn position of avoiding bank
stocks, even in the face of an otherwise very bullish chart.
I may simply be the last guy on this train but I simply
can't bring myself to get on board just yet.
After an unrelenting rally that lasted about a
year, the index of the housing sector has traded sideways for the
past three months. Perhaps it's taking
a breather to allow the reality of the gains in housing
to catch up to the outsized expectations. Either way, based on the data, and
the chart, there's no reason to think this bull market has run
After failing multiple times to pierce interim
resistance around 56, the index for the developed international
markets may have finally broken through, although it will take a
week or so to validate the move. If it succeeds, the
next resistance appears at 62. Investors who (rightly) bailed on this asset class
thanks to the unrelenting bad news emanating from Greece, Spain,
France and Portugal (to name a few beleaguered countries) have missed out on
this rally. The question remains how lasting this rally will be.
The chart of the emerging markets
continues to be virtually identical to the one for the developed countries.
I've been waiting for months for this correlation to end
and I've been wrong all along. I don't understand why
this synchronicity exists and I don't know how much longer it will continue.
It just makes no sense. As a result, starting
in January, I'm going to eliminate this chart.
The Shanghai index has been a horror show for
three years! Each time there's been a hint of recovery it's
been quickly squashed, especially over the past two years. Recently
the index was in danger of dropping below a critical support level
around 1,850. The good news is that support held (at
least for now) and a recovery seems to be in progress.
I've been asking why the Chinese market has been doing so
badly this year when most other markets are doing so well. What's been
going on that we don't know about? Maybe the Chinese market simply
got too far ahead of itself and had to correct to bring things
back to reality. If that's the case, we could see a heck
of a rally next year.
Now we come to our three contrarian
market indicators. First is the NYSE Bullish sentiment index. This chart suggests that
the market is mildly bullish right now as bullish sentiment is
almost 64%. RSI has recovered from being oversold and is heading towards
overbought territory. If the index moves above 65, I'd expect the
market to turn down.
Next we see that about 58% of
stocks traded on the New York Stock Exchange are currently trading above their
50-day moving average, up from only 20% just a month ago.
I show the "swing line" of interim resistance at 50%. As we're just
above that level, we're not overly bullish so I wouldn't expect any correction
to be too severe.
Finally, we look at the VIX, or the "fear
index". We had a brief rise in the VIX through October,
culminating just below 20 in early November. Since then, it's
fallen as low as 14.7 before settling around 17. None
of this suggests any big move upcoming one way or another. Of course, any big
news about the Fiscal Cliff could change that in a hurry.
Thinking and Doing
As I've been thinking about the
Fiscal Cliff quite a bit, whether I want to or not,
I'm going to excerpt part of a recent article I posted
on my blog as it crystallizes some of my thoughts.
"There are [two] weeks left in the year and the
world won't be coming to an end, literally or figuratively,
regardless of what the various doomsday prognosticators have to say.
It's impossible to turn on the television or open a newspaper
without being assaulted [by] dire warnings about the impending
disaster that is the "Fiscal Cliff". It's gotten to the point where
I can only watch CNBC is when it's on mute.
While I'm growing more and more angry and frustrated (if
that's even possible) at the intransigence emanating from both
parties in Washington, I honestly don't think the looming fiscal
cliff is really the nightmare everyone is saying it will be. It
is HIGHLY UNLIKELY that every tax increase and spending cut will, in
fact, come to pass. Some compromises will certainly be made by our
leaders in Washington, despite the radical bleatings of the far
right and far left.
So if we're able to drown out the noise about the cliff,
what should you be truly focused on between now and the end of the
year? Given all of the current uncertainly, there are no simple
answers, but here are a few suggestions for you to ponder:
- If you have large unrealized gains, consider realizing some of
them this year to take advantage of the low capital gains tax
rate, which is likely to rise next year.
- If future capital gains taxes aren't really an issue, don't
forget to match gains with losses where possible to minimize your
tax bill this year.
- Check your portfolio to see if your holdings
need to be rebalanced. Avoid having any one position be too large
a percentage of your overall holdings. I generally like using 10%
as a maximum position size. Similarly, either add to, or get rid
of, positions that are simply too small to make a
- If you have a large estate, consider making
gifts of up to $5.1 million before year-end to take advantage of
the large estate tax credit that expires this year. Unless a
compromise is reached, it reverts back to $1 million next
- Speak with your adviser to make sure your
investments are suitable for your financial objectives and risk
tolerances. Times and conditions often change, and our investment
approaches sometimes must change as well.
- If you don't have a will; write one. If you have
a will, but haven't updated it in more than five years, it's
probably time to look at it again.
- If you haven't already done so, consider giving
some of your time and/or money to a worthwhile charity. There are
so many organizations out there that desperately need your help,
especially during the holidays. So open your heart and your wallet
and make a difference for those in need."
After sitting quietly for a
couple of months, squirreling cash away for the proverbial rainy
day, I finally decided that it was time to put some of those funds
to work. I have spent the past week or so reviewing every account I
manage. As a result, I've done a little bit of tax-loss selling and
quite a lot of rebalancing. I've made the hard decision to eliminate
a few more long-held securities while concurrently buying initial
positions in three new companies: a leading chip manufacturer in the
mobile phone space, a leading payroll company and a top medical
device provider. I'm extremely optimistic about the long-term
prospects for each stock. By the time I'm finished with this process
my accounts will be set to shine in 2013.
Professional News and Notes
This year has been one of transition
and change for me. As many of you know, I started writing a
blog this fall. For those of you who haven't yet checked
it out, please do so and begin a dialogue with
me. I've spent a lot of time (and money) updating and
upgrading many of my programs and processes, as well
as a lot of my hardware. I bought a new computer, a
color printer and a new UPS backup battery. I received an iPad as a
gift and loaded it with a number of applications that allow me to
work while on the go. I invested in a new CRM, a
client vault, a social media archiving program and
upgraded accounting software. Whew. I'm glad that's all over
with. All of these moves were made to
keep me streamlined, compliant and better able to deliver top quality service to my clients
at a very competitive price. With all of
these changes behind me I'm ready to turn the calendar and
begin the new year at full speed ahead.
Speaking of updates and upgrades, the work on
my new website is also progressing very well. After almost nine
years with my current site I felt it was time to "freshen the look" and make it more current and
accessible. I hope to have it up and
running when we all return to work in January. I'd love
to hear what you all think of it.
I had a
goal of reaching 500 twitter followers by the
end of the year and unfortunately it looks like I'll come up short as I've
just surpassed 460. So if you use twitter,
please follow me as a way to remain abreast of all
the daily news and action in the market.
I've now written over two dozen original
articles in my blog and I'm
slowly building up a a following, which is extremely
gratifying. I hope to pen a couple more entries between now and the end of
the year. Then we get to start all over again next year. Towards that end,
I'd be very interested in hearing what you have to say. So
please check it out and share your thoughts by clicking here. As I'm trying
to expand its coverage, I would really appreciate it if
you could forward the link
to some of your friends and colleagues and comment
on one or more of the existing blog
posts. It would also be helpful if you could let me know what you'd like
me to write about, because after all, it's
about your money. If you "follow" the blog, you'll be notified by
email any time I post some new copy.
Finally, my next newsletter will be my highly
anticipated Fearless Forecasts edition. Every January I make a dozen
or so prognostications about the stock market, the economy and even
the Super Bowl. In addition, I review, one-by-one, each prediction
from the prior year. So stay tuned in early January to see how I did
and what I think will happen in 2013.
As always, I
thank you, my readers, and remind you that this newsletter is for you.
I have been writing News and Views for over nine years now. If you'd
like to read any prior edition, simply go to my website and click on
the link to my newsletter archives. I hope you have learned
something about our economy and our stock market, and that you will
continue to follow along with me in 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 Rights