Werlinich Asset Management, LLC

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November 21, 2013

This Historic Rally Marches On

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

The Dow Jones Industrial Average currently stands at 15,900, up a healthy 508 points, or 3.3%, from when I wrote to you last month. This leaves the venerable average up a very robust 21.3% from the 2012 year-end closing price of 13,104. The DJIA is just below its all time high set just two days ago. It's important to note that the transportation average, and the S&P 500, have both powered to all time highs at the same time. This suggests that the rally is broad and likely has legs. So jump on board and enjoy the ride. 

I continue to believe that the market will close the year higher than current levels. Last month I said that "maybe we'll surpass 16,000 along the way." We've already surpassed that mark, if only on an intra-day basis. I expect that we'll see it happen on an end of day basis soon enough. The Federal Reserve will likely remain accommodative well into next year. The only real concern will be when the government fighting begins anew in January. But we'll start worrying about that next month. For now, the financial headwinds should continue to blow the market higher.

The Dow Jones Transportation Average continues its upward trajectory with ever higher highs and higher lows. This is an almost perfectly bullish chart. I think any weakness below the 6,900 level would be a buying opportunity.

The Dow Jones Utility Average looks to be breaking down a bit. After falling for a couple of months, interest rates have moved higher recently, causing distress to the utility sector, which is highly interest rate sensitive. Still, as I don't believe rates will move appreciably higher for at least a few months, I don't think there's too much danger to investors right now, but this bears watching. 

As you can see, the yield on the 10-year Treasury has again rebounded off support at around 2.45% and moved higher in recent weeks. Last month I wrote that I was "surprised to see the yield fall [that] far, as it means investors are buying these bonds again. Why accept a 2.5% yield for 10 years when the stock market offers a MUCH better alternative?" Perhaps someone was listening. I expect rates to remain range-bound at least through the end of the year, and likely well into the first quarter of 2014. Then look for rates to start moving higher. 

Last Month's Results

The market continued its historic rally in October with stunning gains across the board. All of the major averages are enjoying huge gains, with better than 20% returns. The tech-heavy Nasdaq and Russell 2000 growth averages have even exceeded 30%. The bond market enjoyed a modest gain for the month as rates stabilized but continues to show a loss for the year. Overall, unless you're overweighted in bonds, you should be very happy this year. 

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

* 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 November 8 was 339,000, a decrease of 2,000 from the prior week's revised figure. The four-week average of 344,500 is about 6,000 lower than the tally from a month ago. According to the seasonal average, about 2.86 million people continue to collect unemployment insurance, which is roughly the same as the prior month.
  • The non-farm payroll employment report in October was a big change from the desultory results from the prior three months. The establishment survey reported that, surprisingly, an astonishing 204,000 jobs were added in the month, while an additional 60,000 jobs were added through revisions to the results for August and September. The household survey reported that the unemployment rate inched up to 7.3%. 11.3 million workers continued to be counted as unemployed and the labor force participation rate dropped to 62.8%, which is very disturbing.
  • The more comprehensive U-6 "underemployment" rate increased to 13.6%. 4.1 million people continued to be unemployed longer than 27 weeks, the seasonally adjusted number of people who could only find part-time work increased slightly to 8.0 million and the number of marginally attached workers remained at 2.3 million. The number of people holding multiple jobs rose to 7.0 million. The average hourly wages for blue collar workers perked up to $20.26 while the average work week dipped to 33.6 hours. Overall, there were positives and negatives here; but without strong follow up over the next few months, this is unlikely to change the stance of the Fed.
  • The The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget surplus of $74 billion in September, which contributed to a full year deficit of about $680 billion, which was $409 billion less than the record figure reported in fiscal 2012. It also marked the first year since 2008 that the deficit was under $1 trillion. As a share of the nation's GDP, the deficit declined from 6.8% in 2012 to 4.1% in 2013.
  • The Census Bureau reported that the U.S. trade deficit of goods and services was $41.8 billion in September, a small increase from the prior month, but in line with the deficit levels for the rest of the year. I expect slightly lower deficit levels next year.
  • The National Association of Homebuilders/Wells Fargo Confidence Index remained unchanged in November from a downwardly revised level of 54 in October. Even after this small dip, confidence remains strong as for the sixth consecutive month more builders have viewed market conditions as good than poor.
  • The Census Bureau still has not released any figures on new housing starts since the government shutdown.
  • The Census Bureau still has not released any figures on new home sales since the government shutdown.
  • The National Association of Realtors reported that on a seasonally adjusted annualized basis, 5.19 million existing homes were sold in October, a decrease of 3.2% from September but still 6.0% higher than a year ago. The estimate of homes for sale held steady at about 2.1 million, which represents 5.0 months of inventory at the current rate of sales. The median sales price remained around $199,500, which is below the rising 12-month average of $207,767. This was a disappointing report, as I predicted last month. And now we're heading into the seasonally slow period. 
  • According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector expanded in October for the fifth straight month as the index increased to 56.4, the highest reading of the year. At the same time, the ISM index of non-manufacturing activity increased to 55.4, which  marked growth in the service sector for 46 consecutive months.
  • The The Conference Board reported that it's index of Leading Economic Indicators increased 0.7% in September, following an 0.7% increase in August. Says Ken Goldstein, economist at The Conference Board, "The September LEI suggests the economy was expanding modestly and possibly gaining momentum before the government shutdown. Beyond the immediate fallout of the shutdown, the biggest challenge is whether relatively weak consumer demand, pinned down by weak wage growth and low levels of confidence, will recover during the final stretch of 2013 and into 2014."
  • According to the Bureau of Economic Analysis, the "advance" estimate of GDP growth for Q3 2013 was a relatively robust 2.8%, up from the revised estimate of growth in Q2 of 2.5%. This is a big improvement over the meager 1.1% growth generated in Q1 and the anemic 0.4% growth in Q4 2012, but still below the robust 3.1% in Q3 2012.
  • The Federal Reserve reported that in September the amount of total outstanding consumer credit grew at a 5.25% annualized rate, to around $3.05 trillion. This is, by far, the highest number I've noted since I first started reporting this statistic in 2007. Where is all of this consumer debt going? Some of it is in the record levels of margin debt. Still the retail sector remains disturbingly quiescent.
  • The Conference Board's Consumer Confidence Index plunged to 71.2 in October after a small dip in September. Says Lynn Franco, Director of The Conference Board Consumer Research Center "Consumer confidence deteriorated considerably as the federal government shutdown and debt-ceiling crisis took a particularly large toll on consumers’ expectations. Similar declines in confidence were experienced during the payroll tax hike earlier this year, the fiscal cliff discussions in late 2012, and the government shutdown in 1995/1996. However, given the temporary nature of the current resolution, confidence is likely to remain volatile for the next several months."
  • According to the FDIC, one bank failed in October, leaving the total for the year at 23, versus 47 through the same period last year. My target of 25 bank closings for the year looks like it might be safe after all.

Trends To Watch

After falling steeply for four months, the dollar index has rebounded off support at 79 and moved a bit higher this month. I'm not sure what to make of this except perhaps that the renewed strength in the dollar owes its thanks to recent vigor in the economy. It's hard to know for sure, but we'll keep our eye on this because a stronger dollar would spell trouble for the metals and materials sectors.

The price of gold is once again headed lower, and approaching major support around $1,200. Should it pierce that support, the subsequent drop could be precipitous. At least in the short-term, this could get very ugly.

Surprisingly, the price of West Texas crude continues to drop. It has already fallen through interim support  (green dotted line) and is headed to major support around $86. The price has fallen well below both moving averages. Those same averages are nearing a "death cross", which is very bearish. But interestingly, the stock prices of many of the leading names in the energy sector, like Exxon, Chevron, ConocoPhilips, Schlumberger and others are all doing quite well. I can't explain the disconnect except to suggest that the bullish stock market is either ignoring the falling commodity price or it's discounting an expected price rise in the near future. We should know more next month. 

I'm going to sound like a broken record here but the bull market in the financial sector continues unabated. Note how the price remains above both moving averages and stubbornly refuses to drop below the rising trendline (in blue). All I can do is reiterate what I keep saying: buy on weakness. 

The trend in the housing sector isn't as easy to discern, although the year-long trading range is quite obvious. It's likely interest rates will determine which direction this chart heads. Until rates move out of their trading range it's unlikely the housing market will move out of it's range. The good news is that the 50-day average looks to move above the 200-day average and RSI is trending higher. 

The index for the developed international markets continues to make new highs. The current price is well above both moving averages and has carved out an ever-widening trading channel. RSI is no longer overbought and MACD is moving higher, so this rally can continue. This is a bullish picture. 

The chart below, showing a slightly more robust Shanghai Index, is one of the more important indicators of health in the global economy. It is no coincidence that metals and mining stocks in the U.S., not to mention much of the industrial complex, have performed very well lately concurrent with the rally in the Chinese stock market. The index has once again moved through interim resistance around 2,160. The question is can it move above the previous high of 2,270 and take a run at major resistance around 2,450? The moving averages are very close to forming a Golden Cross, whereby the 50-day average moves above the 200-day, and that would be very bullish. I keep saying that a stronger China would be a boon for the world's economy. If this positive momentum continues, it will certainly fuel the year-end rally.

The NYSE Bullish sentiment index remains in solidly bullish territory right now. It's been twelve months and counting since the index last fell below 60, not including the one day during the budget crisis when things looked a bit dicey.. I'm very comfortable with sentiment in the mid-70s. With RSI around 50 there doesn't appear to be much to worry about right now.  

Right now only about 61% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average. This is smack in the middle of the healthy trading range (above the dotted line) and RSI is fine. Again, no danger here.  

The VIX, or the "fear index", has once again fallen back into "complacent" territory, where it has spent the better part of this year. The longer investors remain complacent, the more one worries about the risk of a future upheaval. But for now, things are ok. Maybe this level of complacency is the "new normal". 

What I'm Thinking and Doing

Last month I predicted that since the government funding crisis was put off until early next year, and thanks to the announcement that the supposedly dovish Janet Yellen will be the next Chairman of the Federal Reserve, we would likely have a nice year-end stock market rally. So far, half way through the final quarter, that rally has come to pass. I expect that it will likely be next April, at the earliest, before the Fed begins any meaningful taper program. Therefore, I expect the rally will continue.

My clients and I remain fully invested. Indeed I have only about 2% of my assets under management (AUM) in cash right now. About 56% of my AUM is invested in my top 15 stocks. If you want to see the list, check out the Top Holdings tab on my website. While I continue to remain conservatively invested in companies that dominate their sectors, pay above average dividends and can weather any economic crisis, I have started to nibble with a few select tech stocks. Our returns this year will be solid, but will lag the leading averages because I chose to maintain a defensive posture, expecting a correction that never happened. While I never like under performing the averages, I don't mind doing so in order to keep my clients' funds from being wiped out in a crisis.

As things stand now, I'm very comfortable with our holdings. I own a great selection of companies that will thrive in good times and be somewhat defensive during tough periods. In addition, they pay better than average dividend yields. Our portfolios are built to last for years, if not decades. My clients and I will be able to sleep well at night; can you say the same?

News and Notes

My interview in the November edition of "The Suit Magazine" as been published. Simply click here to view the magazine. My interview is on page 53. I hope you enjoy it.

I recently entered into an important new partnership with ADP Retirement Services. ADP is one of the leading providers of 401k solutions. They allow companies to seamlessly integrate their payroll and 401k plans and eliminate many administrative and record keeping tasks, thereby allowing business owners to focus on growing their businesses. Our new partnership could help businesses reduce their fees, ensure compliance with new Department of Labor regulations and better meet fiduciary requirements. So if you are currently trying to administer a 401k plan and would like a free consultation, please contact me.

There isn't much else to report on this month so I'll end this letter simply by wishing each of you a very Happy Thanksgiving and Happy Hannukah. Enjoy these moments spent with your friends and family and never take these times for granted.

As always, I thank you, my readers, and remind you that this newsletter is for you. I have been writing News and Views for ten 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, or if you know 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

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