Thursday, March 11, 2010

March 8, 2010 Weekly Market Update

Major News of the Week Appetite for Risk Returns

The first week in March saw the market's appetite for risk return following a good jobs number in the US and progress in Greece's debt crisis.

Appetite for Risk Returns

Key equity markets around the world saw positive returns as investors were buoyed by the better than expected jobs numbers in the US as the Department of Labor announced losses for February at 36,000 and the overall unemployment rate holding steady at 9.7%.

The Dow Jones Industrial Average (DJIA) and the S&P 500 had their second best week of the year with gains of 2.33% and 3.10% respectively. For the year the DJIA is now positive with a gain of 1.33% so far in 2010 and the S&P 500 is up 2.12%. Significantly, the New York Stock Exchange Bullish Percent (NYSEBP) reversed back into a column of X's (demand is in control) and closed the week at 68.42% (over 70% is considered overbought). Strongest gains were seen in the Small and Mid-Cap stocks which tend to outperform when investors become more confident and aggressive.

US Treasuries fell in value and the 10-year yield closed the week at 3.6853% up 0.0663. The demand for treasuries is seen as an important gauge of risk. When investors choose the stock market over the safer alternative of treasury bonds, the demand for treasuries drops and the price of those bonds fall. When prices fall, interest rates go up. Also pushing treasury prices down for now is the upcoming week's $74 billion treasury auctions. This new supply acts to hold prices down and keep rates higher. Corporate bonds remained strong with the Dow Jones Corporate Bond Index gaining 0.32% to close at 108.96. The corporate bond markets have shown little real movement since September 2009. I believe this stability is a positive for the credit markets.

News from Greece

In Greece, the parliament passed an austerity measure to cut the annual deficit by $6.52 billion dollars or roughly 2% of Greece's GDP. This voice vote came amid strong protests by public sector workers and retirees who will bear much of the brunt of the cuts (including a 30% reduction in their annual 2-month bonus). Additionally, the Greek government successfully issued $6.52 billion in bonds but at a rate of 6.25%, which is almost double the equivalent rate on comparable German bonds.

The net of these actions resulted in the Euro gaining slightly against the US dollar (+0.07%) to close the week at $1.3627. The MSCI EAFE (World) Index rose 3.18% from February's close and cut its 2010 loss to 2.26%.

While the markets were pleased by the progress made by Greece, it is important to note that Germany did not make an explicit guarantee to buy Greek debt and Germany's Chancellor, Angela Merkel, said Friday at a joint news conference in Berlin with Greece's Prime Minister, George Papandreou, that she was optimistic Greece will not require help. Ms. Merkel is walking a very tight line between supporting the Euro and recognizing that the German public has no desire to directly bail out Greece.

It is too early to call whether or not she will be successful in this wait and see policy just as it is too early to tell if the Euro zone will successfully cope with this current crisis. The markets reduced their negative bets against the Euro slightly, but the remaining positions continue to anticipate a drop in the Euro against other currencies.

Going Forward I continue to underweight international equities, however, I am going to begin adding China back into portfolios. As I said last week, China's growth continues to be steady and I believe that China and the Asian sphere, less Japan, offers growth opportunities.

In the US markets, I continue to favor the Real Estate, Technology, Consumer Discretionary and Basic Materials sectors for now. I believe as this bull rally - which began in March 2009 - ages, it will become increasingly narrow and sector selection will be critical.

March started off with a good surge, but I remain vigilant. The markets are going to demand more than a steady 9.7% unemployment rate in order to grow, and the troubles with Greece, while improving, still remain.

As always, if you have any specific questions on your portfolio or wish to talk to me, please do not hesitate to call.

P.S. If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

Sincerely, Paul Merritt, MBA, CRPC(R) Principal NTrust Wealth Management Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions. Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable, however NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus. The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Dow Jones Corporate Bond Index is comprised of 96 investment grade issues that are divided into the industrial, financial, and utility/telecom sectors. They are further divided by maturity with each of the sectors represented by 2, 5, 10 and 30-year maturities. The Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks traded on the major exchanges around the globe. Securities and Advisory Services offered through Commonwealth Financial Network(R), Member FINRA/SIPC, a Registered Investment Adviser.

Tuesday, March 2, 2010

Market Update February 28, 2010

From a market perspective the last week of February was a quiet one. While there was some discouraging US employment numbers mid-week, in general there was not much to drive the financial markets one way or another.

The Euro/Greece problem was punted into March. The expected Greek debt offering was postponed until this coming week because of the general strike held on Wednesday that brought much of the country to a standstill. The Euro was actually up 0.16% closing at $1.3617 on the EU’s public support for Greece marking the first positive weekly move since the first week of January. For the year, the Euro is down 4.88% against the US dollar.

I continue to focus on Greece because of the importance this situation has on the European and international markets. The problem is fairly simple. Greece’s annual budget deficit now represents over 14% of their GDP while the European Union (EU) standard calls for no more than 3%. Greece’s financial problems, like many other governments, come from unconstrained government spending and a drop in tax revenues due to the global economic slowdown. While the credit markets were quiet this week as the EU publically supported Greece, the actual details and terms of the bailout are unknown. Greece wants direct support, most likely to come from Germany and France, but the German public is unsympathetic towards a country they perceive as having little fiscal discipline. One of the sticking points in the negotiations between Greece and the EU is the EU’s insistence that the Greek government pay government workers 13 months of salary each year instead of the current 14. Yes, Greek workers are paid each year for 14 months work!

In the end it will be interesting to see if Germany and France come in with direct aid, how much the Greek government is willing to cut spending, and how the populations of all countries concerned will react. I believe that if the Greeks get a direct bailout and fail to do much to curtail their spending, then the other weak members of the EU will be unwilling to make tough decisions and the problem will spread throughout the EU. The fact that the Wall Street Journal reported this week that a number of major hedge funds have taken very bearish positions against the Euro gives some indication how top money managers see the ultimate outcome of this problem. I believe this will be a classic example of the old saying, “pay me now or pay me later.”

If you are also thinking that this sounds a lot like what is going on in the US, you are not alone. The debt of the US is fast approaching 10% of its GDP this year. What is different is that we have one currency, one Federal Reserve, and one government. This gives the US the monetary tools to deal with its growing deficit that Greece does not. However, if the US fails to cut spending and increase revenues to the Treasury, we will be in for an extended period of weak economic growth—look at Japan for an example of unconstrained spending and deficit growth. For now, however, the realities abroad have brought dollars to the US and to government bonds. The 10-year treasury yield dropped to 3.62% from 3.78% last week.

As I said earlier, the US equity markets were subdued this week with the Dow Jones Industrial Average (DJIA) falling 0.74% and the S&P 500 was down 0.42%. For the year the DJIA and the S&P 500 are both down 1% after the first two months of 2010. While the markets initially reacted negatively to the weekly jobless numbers, they recovered most of their losses that same day. The NYSE Bullish Percent (NYSEBP) was up a slight 0.56%. There is little to be taken from the numbers other than the markets have shown no real direction this year. During February, the better performing market segments included Real Estate, Consumer Discretionary and the Small and Mid Cap stocks.

The broad international index, MSCI EAFE (World), was up 0.49% for the week but still off 5.28% for the year.

The Dow Jones Corporate Bond index was up 1.23% for the week reflecting some strength in the bond markets that was also seen in the treasury markets. Bernanke stated again in testimony this week that he believes the threat of inflation is very remote due to significant slack in US production capabilities and persistent unemployment. He again reiterated that the Fed will continue its accommodative monetary policy—translation: short-term interest rates will remain low for the foreseeable future.

I continue to remain cautious especially on the international markets. The Greek situation will continue to be forefront, and may well have some kind of near-term resolution when the Greek and German leaders meet in Berlin this Friday. I do not think the Euro Zone will collapse, but they have structural problems with their currency that must be resolved. China bears watching as that country seems to be navigating the current economic problems around the world better than most. Commodities were generally up slightly for the week but have continued to show great volatility.

As always, if you have any specific questions on your portfolio or wish to talk to me, please do not hesitate to call.

Paul L. Merritt, MBA, CRPC® Principal

P.S. If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions.

Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable, however NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.

The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.

All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Dow Jones Corporate Bond Index is comprised of 96 investment grade issues that are divided into the industrial, financial, and utility/telecom sectors. They are further divided by maturity with each of the sectors represented by 2, 5, 10 and 30-year maturities. The Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks trade on the major exchanges around the globe.