NEWS AND VIEWS
Werlinich Asset Management, LLC
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greg@waminvest.com
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February 12, 2015

 
Doing Nothing Is The Best Move Now

Current Market Analysis
Last Month's Results
Statistics to Watch
Trends To Watch
What I'm Thinking and Doing
News and Notes

Current Market Analysis

As I write this before the market opens for business, the Dow Jones Industrial Average stands at 17,862, up a modest 125 points from when I last wrote to you, but as you can see below, it certainly hasn't been a slow and steady rise. After extraordinary volatility in January the market has settled down a little so far in February. As I watch this market, soak in the Q4 earnings results and scan the global economic and political headlines I'm convinced that the best course of action right now is to do nothing. Therefore, I'll reiterate what I said last month: investors need to be patient. Sometimes the best action is no action and I think this is one of those times. 

When looking at the chart of the #DJIA, the first thing that jumps out at me is the extreme volatility over the past six months, especially as compared with the prior six months. And yet with all of the swings since the October swoon, the index has remained within the trading range and mostly above interim resistance (beige line) around 17,350. The current price is also above both moving averages. So this chart tells me all is fine, and it's time to simply sit and the sidelines with my current holdings and watch and wait for the next signal. 

Like the Industrials, the Transportation Index, the other key component of Dow Theory, also remains in bullish mode, although not wildly so. The good news is that the current price of the #DJTA is right around the 50-day moving average and above the 200-day average. Overall, I remain unwavering in my belief that this remains a core sector for investors.


The #DJUA continues on its slow and steady bull run, yet there is weakness right now, thanks to the belief that the Fed will begin to raise rates this summer. As I don't think rates will be lifted any time soon I believe this will be a buying opportunity. The current price is above the 50-day moving average but above the 200-day averages and trading in the upper end of the trading range. Both RSI and MACD look weak, so I wouldn't do anything just yet. But if the index falls below 600 I would be a buyer.


The yield on the 10-year Treasury continues to be one of the most important investment themes I follow. The yield has fallen near, but not quite down to, historic lows. Under normal circumstances, it's hard to understand why investors would choose to accept a return of less than 2% over ten years, but these are not normal circumstances. More than a dozen countries are now charging investors to own their debt or hold balances in their bank accounts. In that light, 2% looks awfully good. Last month I wrote that "I now believe that yields will fall even further, perhaps even challenging the historically low yields from 2012. Amazingly, the bull market in bonds is not over yet." I stand by those words.


Last Month's Results

2015 started with a thud, as all the major indices fell in January. Interestingly, the worst performing sector was large-cap value stocks and the best performing group was government bonds. And EAFE (temporarily) bucks the downward trend by gaining 0.5%. I expect the EAFE to turn south long before the year is over. Bonds will likely tread water for the year as rates stabilize. Equities will likely go up this year, but it's going to be a challenge to make steady profits.

Name of Index

Jan

QTD

YTD

Description

S&P 500

-3.0

-3.0

-3.0

Large-cap stocks

Dow Jones Industrial Average

-3.6

-3.6

-3.6

Large-cap stocks

NASDAQ Composite

-2.1

-2.1

-2.1

Large-cap tech stocks

Russell 1000 Growth

-1.5

-1.5

-1.5

Large-cap growth stocks

Russell 1000 Value

-4.0

-4.0

-4.0

Large-cap value stocks

Russell 2000 Growth

-2.3

-2.3

-2.3

Small-cap growth stocks

Russell 2000 Value

-4.2

-4.2

-4.2

Small-cap value stocks

MSCI EAFE

0.5

0.5

0.5

Europe, Australia, Far East

Barclays Aggregate

2.1

2.1

2.1

US government bonds

Barclays High Yield

0.7

0.7

0.7

High-yield corporate bonds

* Return numbers include the reinvestment of dividends

Statistics To Watch

  • According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended February 7 was 304,000, a big increase of 25,000 from the prior week's revised figure, and higher than the figure from this time last month. The four-week average of 289,750 is the same as the tally from a month ago. About 2.35 million people continue to collect unemployment insurance, which is about 100,000 less than last month. There really isn't much to be taken from these numbers. 
  • The non-farm payroll employment report in January handily beat expectations as the establishment survey reported that 257,000 jobs were added in the month, while revisions added an astonishing 147,000 to the prior two months. The household survey reported that the unemployment rate ticked up to 5.7% as job applicants flooded the workforce. The more comprehensive U-6 "underemployment" rate also increased slightly to 11.3%. 9.0 million workers were still counted as unemployed (three  hundred thousand more than last month). The labor force participation rate rose to 62.9%. Can this finally be the month where the participation rate finally begins to move higher? We'll see.
  • 2.8 million people remained unemployed longer than 27 weeks, the same as last month. The seasonally adjusted number of people who could only find part-time work stayed at 6.8 million and the number of marginally attached workers dropped to 2.2 million. The number of people holding multiple jobs fell to 7.29 million. Even the average hourly wages for blue collar workers increased by $0.07 to $20.80 while the average work week stubbornly held at 33.8. So jobs are being created, but workweeks are being held back, possible by companies seeking to stay below Obamacare guidelines.
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $195 billion in January, leaving the four-month deficit at $195 billion, about $12 billion more than the shortfall recorded in the same period last year. It's anticipated that the full year deficit will be around $468 billion, down from a deficit of $483 billion in fiscal 2014.
  • The National Association of Homebuilders/Wells Fargo Confidence Index dipped one point in January to 57. This marks the third straight month that the index has hovered in the upper 50s range. “After seven months above the key 50 benchmark, builder sentiment is reflecting the gradual improvement that is occurring in many markets throughout the nation,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Del. Slow and steady wins the race.
  • The Census Bureau reported that privately owned housing starts rose 4.4% in December, to a seasonally adjusted annual rate of 1,089,000 units, which was 5.3% higher than a year ago, and back to their record levels. New building permits fell 1.9% from the prior month but remained 1.0% higher than the year before. As these are cold winter numbers, I'm not worried and I expect January will be mediocre as well.
  • The Census Bureau reported that on a seasonally adjusted annualized basis 481,000 new homes were sold in December, up 11.6% from November and 8.8% from a year ago. The estimate of the number of homes for sale is 219,000, which represents 5.5 months of inventory at the current rate of sales. The median sales price rose to $298,100, an increase of $6,500 from the prior month (revised), leaving it at the highest level recorded in the past 10 years, and well above the 12-month moving average price of $282,300. This appears to be a pretty healthy housing market.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, 5.04 million existing homes were sold in December, an increase of 120,000, or 2.4%, from November and  up 3.5% from a year ago. The estimate of homes for sale is 1.85 million, which represents a very slim 4.4 months of inventory at the current rate of sales. After falling for five straight months, the average selling price inched higher to $209,500, which is slightly higher than the rising 12-month average of $206,808.
  • According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector dipped at bit again in January to 53.5, but still marked overall growth for twenty straight months. The ISM index of non-manufacturing activity increased to 56.7, which still signaled growth in the service sector for 60 consecutive months. These numbers demonstrate modest economic growth.
  • The Conference Board reported that its index of Leading Economic Indicators (LEI) increased 0.5% in December, following a gain of 0.4% (revised) in November. "December’s gain in the LEI was driven by a majority of its components, suggesting the short-term outlook is getting brighter and the economy continues to build momentum,” said Ataman Ozyildirim, Economist at The Conference Board. “Still, a lack of growth in residential construction and average weekly hours in manufacturing remains a concern. Current economic conditions measured by the coincident indicators show employment and income gains are helping to keep the U.S. economy on a solid expansionary path despite some weakness in industrial production."
  • According to the Bureau of Economic Analysis, GDP increased at an annual rate of 2.6% in Q4 2014 according to the "advance" estimate, a substantial drop from the estimates of 5.0% and 4.6% in Q3 and Q2 respectively, but well above the anemic decline of 2.1% in Q1. I would expect GDP growth going forward to be in the 2.5% to 3.0% range. 
  • The Federal Reserve reported that in December the amount of total outstanding consumer credit grew at an annualized rate of 5.5%, up to $3.312 trillion. The amount of outstanding consumer credit has increased every month since July 2012 and is at the highest level since I started tracking this in 2004. With interest rates near zero there is virtually no incentive to save any longer. 
  • According to the BLS, the seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) declined 0.4% in December, after falling 0.3% in November. If you take out food and energy, CPI was unchanged in December. Over the last 12 months, the index increased a mere 0.8%. The drastic (9.4%) decline in the price of gasoline helped cause the drop, even as the cost of food, shelter, medical care and travel all increased.
  • The Conference Board's Consumer Confidence Index, which increased in December, rose sharply in January 93.1 (adjusted) to 102.9. Says Lynn Franco, Director of The Conference Board Consumer Research Center, "Consumer confidence rose sharply in January, and is now at its highest level since August 2007. A more positive assessment of current business and labor market conditions contributed to the improvement in consumers’ view of the present situation. Consumers also expressed a considerably higher degree of optimism regarding the short-term outlook for the economy and labor market, as well as their earnings."

Trends To Watch

In order to put the gains enjoyed by the dollar into the proper perspective I've had to broaden the time frame to thirteen years. Doing so allows us to see that the dollar index hasn't been this high since the end of 2003. The dollar simply continues to appreciate against almost all other currencies. We are already seeing the negative repercussions for commodity prices (oil, precious and base metals) as well as the reduced earnings of companies that generate significant sales from overseas. This will continue to be an important investment theme this year. Notice all the companies that have reduced their guidance for 2015 based on negative currency translations. It won't be good for their stock prices.

Here is the other incredibly important chart. The price of West Texas Crude remains in a severe downtrend. What is important is if the price can remain above major support at $40. Last week the price fell to $43 before bouncing above where it holds today. If this support holds multiple assaults I may gain some comfort that a bottom will have been made. Until then, I patiently wait and watch. 

Last month I said if the price of gold got above $1,225 it might be a signal to buy. As you can see below, the price broke $1,300 before falling back to $1,225. For now, barring any new announcements from the Fed, I would stay out of this trade because gold could be headed back down.  

The strong dollar is certainly no friend to the price of copper, which has now fallen below major support around $2.80. The next level of support is the financial crisis low of $1.25. I can't help but think that copper has simply fallen too far. Things are MUCH better now than they were during that crisis. That suggests to me that a buying opportunity isn't far away. I realize the strong dollar controls it's fate, yet some real profit awaits the investor who is willing to buy copper stocks sometime in the next few months. 

The Nasdaq Composite continues its relentless climb to surpass the record closing price of 5,048.62 from March 10, 2000. The index is now only 210 points, or about 4%, below the record. It's been a VERY LONG road to get to this point. I'm on record saying I expect the tech-heavy index to finally push through that level sometime in the first half of this year. Accordingly, I increased the tech exposure in my portfolios.

Last year I made two well-timed two "buy" calls on the financial sector. Last month I suggested that if the price approaches 23.5 it would be a good entry price, and so far, that's proven correct. The index remains solidly within the trading range and well above the 200-day moving average. RSI is stable and MACD has turned up, so for now, everything looks fine. 

This month I've widened the horizon on the chart of the housing index to give you a greater perspective on the price action. It has taken more than eight years, but the index has finally returned to a level not seen since the beginning of 2007. I think resistance will be broken before Memorial Day. 

In December I told you to avoid the developed international markets. After falling further in early January it's rebounded strongly over the last month, but it hasn't yet been able to pierce resistance at 65. Since I don't expect things to improve any time soon I'm reiterating the call to stay away from this sector.

The Shanghai Index has gone parabolic over the last seven months. And looking at the chart now, seeing that RSI and MACD are both extremely overbought, I would sit and wait for the inevitable correction. Because when it comes, it's going to be a doozy. In fact, maybe it's already begun. 

The NYSE Bullish sentiment index proved to be a very good contrary indicator last year. If you bought near the bottom of each of the four declines you would have done very well. Last month I said "the market could go either way in the near-term, so I wouldn't be a buyer or a seller right now." Since the market seems neither bullish nor bearish right now, I'll reiterate that advice.

The VIX is fairly sanguine right now, showing neither fear nor complacency. This further validates my belief that investors should just be sitting tight right now, collecting their dividends and waiting for the next buying opportunity. 


What I'm Thinking and Doing

I think the US economy remains one of the few bright spots of the developed world, and our consumption continues to drive the growth of the less developed countries. That's a good thing. The increased value of the dollar relative to other currencies will provide a headwind to the profitability of US corporations this year. That's not a good thing, at least in the short-term. Regardless, I think the US economy will continue to hum along, at least until summer. Then we'll do battle with the rumors of increased interest rates alongside the traditionally weak summer selling season. I also believe that Europe will struggle more than most observers expect, so I would focus my investments on companies in the US. I expect the Fed will leave short-term rates unchanged for longer than anticipated so as not to risk dampening the modest GDP growth and giving a further boost to deflationary fears. Therefore rates will remain quiescent, and could fall to as low as 1.5%. As a result, interest rate sensitive sectors like REITs and utilities will continue to do well, as will investments that pay generous dividends.

So what am I doing right now? As you might have guessed, nothing. I don't think I've placed five trades yet this year. I'm simply holding my existing positions, collecting my dividends, and waiting. I'm in no hurry to buy anything, nor am I compelled to sell anything. I feel the best thing to do now is to sit tight, build up some cash and be patient. There will be a buying opportunity sometime in the next few months. When that time comes, I'll be ready to act. I expect sometime in the next few months I'll be ready to buy some selected stocks in the beaten down energy sector at bargain basement prices. That may be my next big purchase.

News and Notes

2015 has begun with sleet, snow and unrelenting freezing temperatures. Other than that, things are going well. I've had two local swim meets, both of which went pretty well. My times are about where they should be for this time of year. Now it's all about getting ready for my big meets in March and April. 

Last month I wrote that "I made philanthropy a much more important part of my life last year, with both my time and my money. Going forward, that commitment will only become more important and more meaningful [and that] we all need to step outside of our own selfish needs and try to help those less fortunate and make a difference in the lives of those around us. If we each do that, in ways large and small, we can all play a part in improving all of our lives." I would be very pleased to speak with any of you about this, and how you could join my effort to enrich the lives of others by giving back to those in need.

Along those lines, I'm incredibly excited and proud that Kathiryn and I have been asked to co-chair the annual fund-raising gala for an organization called Cluster that provides a wide range of much needed community services in Yonkers, NY where the need in Westchester is greatest. This year will celebrate the 40th anniversary of the formation of Cluster, so the gala is sure to be a big one. To learn more about this organization, please click here. I'll provide more details about the event later this year.

That's it for this month. As always, I thank you for reading. If you'd like to speak with me about your investment needs, or if you know of someone that might benefit from my guidance, I'd be pleased to be of service. Simply give me a call or drop me an email.

Best regards,



Greg Werlinich
President


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