Wednesday, May 26, 2010

Weekly Market Update - May 23, 2010

This past week saw markets around the world tumble as uncertainties about nearly every economic topic left investors wondering just how bad it might get.

For the week, the Dow Jones Industrial Average (DJIA) lost 427 points (-4.02%) closing at 10,193. The S&P 500 fell 48 points (-4.23%) closing at 1088. May has been a tough month with the DJIA off 7.4% and the S&P 500 down 8.34%. The year is now negative once again with each of the major indexes off a little more than 2%.

The MSCI (EAFE) World continued its weakness falling 4.44% for the week, it is down 12.65% for the month, and over 14% for the year.

The Euro managed to gain 2 cents against the dollar moving from $1.236 to $1.2568. The Euro's downward trend, however, continues to worry investors and will have serious implications for all global economies.

Commodities in general have continued to show weakness. Oil continued to slide closing the week at just under $70.04 per barrel down about $1 from the previous Friday's close. Gold fell just over 4% for the week closing at $1176.10. Oil is falling on concerns about weak global growth and a stronger dollar, while the movement of gold is less specific. As economic concerns grow in Europe and in the minds of investors around the world, it would be intuitive to expect gold to increase as buyers snap up the metal as a hedge against inflation, sovereign debt defaults, war, you name it. However, that did not happen last week. One report I read suggested that investors were selling gold to settle margin calls against equity trades they had made. This was causing gold to more closely move with equity prices, not as a separate hedge. However, if equity prices stabilize, the demand for gold may overtake margin-related sales and the price of gold could again start rising.

Demand for US treasuries remained strong and the 10-year bond closed at 3.261% compared to 3.4571% last week as global investors sought safety in US government bonds. This is likely to lead to lower home mortgage rates and smooth the transition as the Fed curtails its direct purchase of home mortgages in the open market. Corporate bonds continued to show strength-a trend that is likely to continue for now.

Last Week Was a Mess

I am not going to break down the variety of issues that helped drive markets down last week. You have likely heard news coverage of most, and I have discussed nearly all of them in previous updates.

As a quick summary they include: the Euro Zone/Euro/Greek debt crisis, unexpectedly bad weekly jobless numbers (on-going high unemployment), concerns and uncertainty surrounding the Finance Reform Bill working its way through Congress, the on-going oil spill disaster in the Gulf of Mexico, and I will throw in concerns about North and South Korea going to war for good measure.

One additional factor in the Euro Zone crisis was German officials announcing unilaterally that their country was temporally banning naked short-selling and naked credit-default swaps of Euro Zone government bonds. Additionally, Germany included 10 banks into the mix of banned securities as well. The US took similar temporary measures in 2008; however, in the case of Germany, markets were especially rattled because of the apparent lack of coordination between Germany and other members of the European Union (EU)-raising concerns about the ability of EU governments to effectively coordinate actions to stem the current crisis and create an effective long-term solution to the sovereign debt problem.

Is it Time to Buy?

With the dramatic sell-off last week, the talking heads on TV are all asking, "is now the time to buy stocks?" "Will last week be the bottom of the current sell-off or will the markets continue to fall?" Everyone has an opinion and maybe half of them will be right-but no one knows which half it will be.

Those of you who have been working with me for any amount of time know that I do not make predictions. I don't because no one can consistently be on the right side of market prognostications. Predictions are fun to read, and sometimes they offer some sense of security because we find someone's views that match ours and thus confirm for us we are doing the right thing. However, I have learned after years in the securities business to depend on quantitative market indicators that are based upon relative strength analysis coupled with point and figure charting-not instinct or intuition.

As a quick review, I follow five major asset categories: US equities, international equities, commodities, currencies, and fixed income. Using rigorous relative strength analysis, each major category is compared to the other and the strongest prevail. Before an asset category can be favored, it must also prove stronger than cash on a relative strength basis. If it is not, cash is recommended.

Equities, either international or US, have been favored since April 2009. As of Friday, neither was. International equities were dropped on May 6, 2010, and replaced by cash. US equities, however, remained in favor-until market close on Friday when this category was replaced by fixed income.

Based upon quantitative analysis, the answer to the question of the day is no. It does not appear that now is the time to buy equities.

Looking Ahead

I have discussed the need for discipline in the face of so much market uncertainty. Discipline and commitment to follow the quantitative guidance provided by the in-depth relative strength analysis provided by Dorsey Wright & Associates. As Tom Dorsey said in a podcast over the weekend, you don't have to be the fastest around the track; you need to make it around the track.

One of the frustrating aspects of this type of investment strategy is that we will always be late coming into a bull market and a little late getting out of a bear market. This is because enough of a trend must be developed before the change is made. You do not want to be bouncing in and out of the markets every day or week; rather you want to make changes when there are major shifts in trends. This frustration can be compounded when markets fail to provide any real direction and trade sideways or when a major trend is reversed.

For now, a clear signal has been sent. Equities are not favored. Bonds and cash are. Safety is the key. Does this mean the markets are headed straight to the bottom? Hardly, I would expect the market to rise and fall as it normally does but with a downward trend-for now.

I cannot predict how long this "no equity" (or reduced equity exposure) will last. The last time both favored asset categories did not include US or international equities was January 4, 2008. International equities re-entered as a favored asset category on April 13, 2009. US equities returned on September 4, 2009. Only market action will drive the quantitative changes that in turn will lead to changes in the favored categories.

I am recommending investment in quality bonds, especially corporate intermediate-term. A portion of the investment can also include some quality international bonds.

Gold is expensive at this time and not as safe an asset class as you may believe. However, I am watching all commodities closely to see if there is an appropriate time to bring into portfolios.

Treasuries are very strong, however, I remain extremely concerned that treasuries are very expensive at this point in time and new positions should be entered into thoughtfully.

Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

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, AIF(R). 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, May 18, 2010

Weekly Market Update May 16, 2010

Last week started with a major recovery in markets around the world only to see concerns about the effectiveness of the European Union (EU) bailout package dominate the headlines and pull down markets.

For the week, the Dow Jones Industrial Average (DJIA) gained 240 points (+2.3%) closing at 10,620. The S&P 500 also gained 25 points (+2.2%) closing at 1136. This puts both of these major US indexes back into positive territory for the year with both the DJIA S&P 500 up about 1.8%.

The MSCI (EAFE) World gained 1.9% but is still down 10.3% for the year.

The Euro fell another 4 cents against the dollar closing at $1.2361 compared to $1.2760 from a week earlier. For the year, the Euro has lost nearly 14% to the dollar raising concerns that the Euro might weaken further.

Oil has continued to lose in the face of a strengthening dollar closing in New York on Friday at just under $71 per barrel, the lowest since early February. Gold continued to rise and reached an intraday record of $1249.70 an ounce on Friday before closing the day at $1227.80. Gold continues to rise as fears about a failing Euro remain.

Demand for US treasuries remained strong; however, the yield did rise over the week closing at 3.4571% up slightly from last week's 3.4199%. Corporate bonds continued to show some strength with small gains from the previous week.

The Verdict Is Not Looking Good

Headlines turned decidedly negative as the week wore on about the future of the Euro Zone.

Discussions have moved from can Greece be saved to can the Euro be saved. This change in dialogue began when reports surfaced about French President Sarkozy's argument with German Chancellor Merkel and his threat to leave the Euro if Germany did not agree to help fund the bailout package. Merkel has always been hesitant because the bailout is very unpopular in Germany; however she relented, the bailout package was agreed to, and Merkel came under immediate criticism by the German media. The voters also voiced their displeasure by voting against her party in a significant local election removing Merkel's majority in Germany's upper house.

I don't have the space to go into the details about European history and politics that are playing into this crisis, but I will say that the Euro Zone is under the greatest threat since its creation and points to its most fundamental flaw-an organization that has a common currency but not a common political foundation. The European Union was founded by a belief (and hope) that a common currency, and its accrued economic benefits, would be strong enough to pull politically dispersed countries together. The jury is still out.

For the US the stakes are high. The Euro Zone is a major economic trading partner with the United States. If Europe cannot pull itself together the fear is that our recovery is still fragile enough to be wounded by a weakened Europe. Additionally, the US is indirectly participating in the bailout by providing currency swaps with the European Central Bank (ECB)-this is a mechanism by which the ECB can meet demand for dollars by exchanging or swapping Euros for US dollars provided by the US Federal Reserve. Additionally, Greek Prime Minister Papandreou announced that Greece may take legal action against unnamed US investment banks for helping cause the Greek debt crisis. There is lots of uncertainty going into the week.

Finger Pointing

Besides the Greeks looking for fault with US investment banks, British Petroleum, Transocean Rig, and politicians all blamed each other for the continuing oil spill in the Gulf of Mexico.

The companies are posturing more for the certain litigation that will follow rather than addressing the issue at hand. I believe there is blame enough for everyone, but what needs to happen now is a 100% focus and effort to stop the oil leak. The impact on long-term supply is uncertain, but oil prices will continue to weaken as economic growth prospects are clouded by the problems in Europe and the weakening Euro.

US economic data for the week was generally good with retail sales gaining 0.4% and industrial output climbing 0.8% for April. Weekly jobs data was just ok, and news that the Federal deficit grew by some $82 billion in April continues to be worrisome.

Treasury Secretary Geitner is headed to China next week to discuss the yuan with the Chinese. While this issue is not of immediate importance for investors, it is worth noting. Most of the world, including the US, believes that China is depressing the value of the yuan making international imports to that mega market more expensive. Allowing the yuan to rise would contribute to higher prices here, but would certainly improve our trading position with China and thus our own economy. The Chinese government has made it very clear that they would only allow the yuan to rise if it suited their internal political interests and for now they do not.

Looking Ahead

Times like this demand discipline or in other words we must control our emotions when making investment decisions. This is where relative strength plays such a vital role. Relative strength does not predict, does not guarantee that you will always make money, and does not prefer one type of investment over another. Rather it helps focus investment decisions towards the strongest stocks, strongest sectors, and strongest broad asset categories based upon price movements. Decisions are made consistently on this analysis, not some "gut feeling."

Current relative strength analysis calls for under-weighting international equities. If you are going to have exposure here then the emphasis should be on non-developed markets over developed ones.

US equities remain favored and should be carried in portfolios. Small and mid cap stocks are preferred over large cap stocks; and the top sectors of real estate, consumer discretionary, information technology, materials, and financials are unchanged. For now, these investments have pulled back and are in more affordable trading ranges. However, if my analysis says it is time to exit these positions, I will certainly tell you.

Corporate Intermediate Bonds and International Bonds are still favored. Bonds continue provide a relatively safe haven for investors as long as interest rates do not begin to rise. If rates do rise, it will be imperative to adapt and I would expect to focus on short-term bonds or inflation-protected bonds.

Gold is near an all-time high but if it and silver continue to hold, I would expect to recommend adding precious metals to portfolios.

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, AIF(R). 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.

Monday, May 10, 2010

Weekly Market Update May 9, 2010

Last week brought back, at least temporarily, our worst memories of September 2008.

For the week, the Dow Jones Industrial Average (DJIA) lost 628 points (5.7%) closing at 10,380. The S&P 500 fell nearly 76 points (6.4%) closing just below 1111. This puts both of these major US indexes into negative territory for the year with the DJIA off 0.5% and the S&P off 0.4%. These drops came in the face of generally good economic news here in the US. Last Friday, the Dept. of Labor announced that 290,000 new jobs were created in April, the best number in four years. Private sector jobs provided the bulk of the new jobs which is a very good trend. The overall jobless rate increased, however, from 9.7% to 9.9%; but in general, the news of job growth is positive and I look to see whether or not these numbers will continue to improve. I believe that government jobs (excluding temporary census workers) will be a drag on the employment numbers as more and more state governments lay off workers in response to their own budget shortfalls.

The MSCI (EAFE) World suffered a 10% set back last week and for the year this broad international index is now down 12% for the year.

The Euro fell to a 14-month low against the dollar closing at $1.2760 compared to $1.3295 from a week earlier and down from its 2009 close of $1.4316.

Oil has shed nearly $11 per barrel in the past several weeks closing around $75 per barrel. It may be counter-intuitive that oil prices should tumble in the face of one of the worst oil spills in history (reduction in near and long-term supply); however, much of the oil price changes have much to do with the strong US dollar. Ninety percent or more of all oil contracts are traded in US dollars. As the dollar gains strength against other currencies, the price of oil rises for most of the world. Higher prices equal lower demand. Also, traders perceive the problems in Europe could result in economic slowdowns and lowering overall demand for oil-hence the lower price of oil right now.

Gold rose to $1210 per ounce as the metal resumed its role as a traditional "safe haven." I would be wary of gold at this price especially if the markets accept the recent moves taken by the EU to help Greece.

Demand of US treasuries surged on worries from Europe driving the yield on 10-year notes down to a 3.4199% close on Friday from its previous Friday's close of 3.6590%. Corporate bonds also performed well during the week but did give back just a little on Friday.

Dow Plummets in Minutes

As bad as the final tallies in the markets were for the week, most people were shaken by the sudden fall of the DJIA and other indexes just after 2:40 PM on Thursday.

During a 15-minute period, the DJIA lost nearly 1000 points falling to 9869 only to see the markets turn right back and gain back most of those losses closing the day at 10,520 (-348 points, -3.2%). This unprecedented volatility left many traders and investors wondering what in the heck just happened. Stories quickly circulated that a trader made a simple order-entry error when selling Proctor & Gamble stock by placing an order valued at billions, not millions of dollars which in turn caused the computers to suddenly start selling in response to the drop in the DJIA (Proctor & Gamble is one of the thirty stocks making up DJIA). At this point in time, the SEC has been unable to determine the validity of that story; however, it is certain that computers, not humans, were the driving force behind the sudden sell-off and recovery.

You may not realize that less than 30% of all trading volume in New York Stock Exchange (NYSE) listed stocks actually takes place on the NYSE. Most stock trading today takes place on a wide network of interconnected computer systems. Using this system has allowed the cost of trading to drop dramatically and the volume to increase to billions of shares each day. It is a far cry from the days when groups of men gathered outside a tavern on Wall Street to negotiate between themselves to buy and sell stocks and bonds. It appears this new computerized system went on autopilot sending sell orders flooding into the system without human intervention.

The SEC and the rest of Washington is launching investigations to get to the bottom of this very important story and I feel certain that the cause will be found and measures put in place to prevent this sort of mêlée from happening again.

Greece, Again and Again and Again

As those of you who have been reading my weekly updates since I started writing them earlier this year know that I have been discussing the financial problems facing Greece since my very first update.

It appears that this situation reached a true crisis level causing much of the selling in markets around the world.

One of the points I have been making about Greece is that a bailout would not work if there were not strong, effective spending cuts put in place by Greece to get their spending more in line with their ability to pay for their that spending. Even as the Greek parliament was passing the initial set of austerity measures, the images of rioters in the streets protesting these cuts was being broadcast nearly around the clock calling into question the ability of Greece to actually impose the kind of fiscal discipline required to get their spending under control. With Portugal, Spain and Italy looming in the shadows, investors felt that the €110 billion bailout package passed by the European Union (EU) the previous week was simply not enough to deal with the "contagion."

Over the weekend, the financial leaders of the EU came together determined to address the perceptions that the amount of the bailout was not enough and that their governments were behind in handling this crisis. The result was an announcement late Sunday, May 9th, that the EU had taken steps to put together a €750 billion ($952 billion) bailout package designed to prevent a collapse of the Euro and the European economies. The US Fed has a major roll in this package because it has agreed to open a window allowing the European Central Bank (ECB) to borrow dollars (giving Euros in exchange) to help European banks meet their dollar demands. The US will also be contributing towards the bailout via the International Monetary Fund which increased its share of the bailout significantly.

The size of the bailout (remember two weeks ago we were discussing a €40 billion bailout) will certainly help address the current crisis. As I am writing this the Asian markets closed up strongly on Monday and the European markets are up dramatically over the early hours of trading. This move may just stem the crisis for now, however, I still find myself asking the exact same question, "will European spendthrift governments reign in their spending and get their budgets in line?" Based upon what we have witnessed in the past couple of weeks, the financial markets will answer these questions for us on their own time schedule. At the very least, the size of the announced bailout will hopefully give European nations time to get their act together.

Looking Ahead

When I mentioned that volatility was likely to be returning to the markets I had no idea just how much. Last week was the most volatile we have seen in over a year. It appears that Monday will get off to another volatile trading session, only this time in the positive direction. There is no certainty that this positive move in the markets will hold and prove that last week was a short, but swift, market correction: or whether or not the markets continue to lose ground.

The Dorsey Wright (DWA) indicators that I follow dropped International Equities out of the favored top two categories of their five major categories (US Equities, International Equities, Fixed Income, Commodities, and Currencies) and replaced it with cash. I am not surprised this happened because the international markets had been fading recently. I was surprised at how quickly the category was pulled out after coming back into favored status just a month or so after being removed in February. This type of volatility in the favored major DWA categories is not typical. Relative strength analysis will struggle and test our patience in tight, range bound markets and turning points. We are currently experiencing the first, and possibly both of those scenarios right now.

Within the US equities space the strongest sectors remain US REITs, Consumer Discretionary, Information Technology, Materials and Financials. The remaining six sectors in order are Industrials, Consumer Staples, Energy, Telecommunications, Health Care, and Utilities.

Small and Mid Cap also remain favored. Growth is preferred over value.

International is to be under-weighted or eliminated, but if you do have international in your portfolios, the focus continues to be on the non-developed countries. I would specifically avoid European stocks.

Corporate Intermediate-Term and International bonds remain favored.

As an investor, you must weigh your risk tolerance and comfort level during these market gyrations. If you are not comfortable, go to the sidelines. The markets ebb and flow. If you missed today's rally because of a desire to preserve principal, there will be other opportunities in the future. Investing is not a day event, but rather a collection of actions over a much longer time horizon.

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

Tuesday, May 4, 2010

Weekly Market Update May 2 2010

US markets closed the week down collectively for the first time in two months despite generally good economic news.

Last week the Dow Jones Industrial Average (DJIA) gave back 152 points (-1.75%) closing at 11,008.61 and the S&P 500 lost 31 points (-2.51%). However, the month of April still managed to post a gain for both major indexes with the DJIA gaining 1.40% and the S&P 500 rising 1.48%. With one-third of the year now in the books, the DJIA is up 5.57% and the S&P 500 is up 6.42%.

International markets were mostly down for the week with the MSCI (EAFE) Index losing 1.89%. For April this index was down 2.10%, and for the year the MSCI (EAFE) is now down 1.88%.

GDP Positive for the 1st Quarter

The GDP numbers for the first three months of the year were released on Friday showing a gain of 3.2%. GDP Positive for the 1st Quarter

The GDP numbers for the first three months of the year were released on Friday showing a gain of 3.2%.

In general the report was good but the markets shrugged off this news to focus on the problems abroad. The biggest contributor to the GDP gain was consumer spending which contributed 2.6% of the overall 3.2% gain in the GDP. Growth in business inventories was also strong, but most other areas of within the economy showed little or slightly negative growth. Government spending was down 0.4% which may come as a surprise given the heavy deficit spending by the federal government; however, the category of government spending also includes state and municipal government spending. States and local governments in the aggregate are cutting spending to balance their budgets and the full impact of these efforts is just now beginning to be felt in the economy.

In other domestic news, the oil spill in the Gulf of Mexico is becoming a tragedy of historic proportions. The two companies most directly related to this terrible story are Transocean (RIG) and British Petroleum (BP). Transocean is the owner of the sunken ship/platform that was doing work for BP. For the week, Transocean fell over 19% and BP dropped nearly 13%. As a sector, the oil and gas producers were off a little more than 2% and in line with the general market pull back last week. Oil prices rose and closed above $86 per barrel. Expect this upward trend to continue as investors weigh the impact of the oil spill on future oil prices.

The oil spill temporarily knocked Goldman Sachs off the front pages, but the stock continued to drop on news that the federal government was actively considering a criminal investigation to go along with the civil review. For the week Goldman Sachs lost 7.75% including the drop of 9.4% on Friday when the markets learned of the criminal investigation. Warren Buffet defended Goldman in his remarks this weekend at the annual Berkshire Hathaway shareholder meeting in Omaha saying the trades under review were made by large, sophisticated investors who knew, or should have known, what they were buying. Buffet has had a very large position in Goldman since a purchase made during the 2008 credit crisis.

Greece Reaches Agreement with IMF and EU

Greece came to terms with the International Monetary Union (IMF) and the European Union (EU) over the weekend.

Terms of the deal were announced with the IMF and EU pledging €110 billion ($145.5 billion) over a three-year period. This number is significantly greater than the €40 billion reported last week and reflects the reality that Greece is in more trouble than originally thought. Coupled with this aid is the requirement that Greece significantly cut spending over this period. Greeks have been in the streets almost daily protesting against the announced austerity measures which will cut pensions and other government programs. While aid is likely to flow, there will continue to be significant political fallout in many of the countries within the EU. Compounding the problems in Greece were the downgrades announced by Standard & Poors (S&P). On Tuesday, S&P announced that Greece's debt was being lowered to junk status and that Portugal's sovereign debt was being lowered to A- (four levels higher than Greece). Then on Wednesday, S&P announced that it was lowering Spain's debt to AA, down one notch from AAA, with a negative outlook. Investor confidence was clearly shaken and contributed to much of the volatility and drops in US markets, as well as, international markets. While the announcement of the terms of Greece's bailout may calm markets for now, I believe that until the aforementioned European countries sharply curtail spending, this crisis will continue with negative consequences to all markets. Spain is of particular concern because it is the fourth largest EU country, and frankly, the EU does not have the resources to bailout Greece, Portugal and Spain. I also believe that this should serve as a warning to all governments (the US and UK in particular) that exploding debts will seriously harm their economies and force politically unpopular moves. Delaying action will only make matters worse.

US Treasuries and Precious Metals Gain

With the growing uncertainty in global markets last week, investors turned to US treasuries for safety.

The yield on the 10-year note fell to 3.659% down from 3.817% of the week before. Corporate bonds in general also saw small gains during the week. The June contracts for gold settled about 2% higher closing at $1180.70 per ounce. Analysts suggest that this is a similar flight to safety as seen in US treasuries stemming from concerns from the Greek debt crisis.

Looking Ahead

Volatility returned to the markets last week. During the 21 trading days in April, the DJIA had 5 days where the index closed up or down by more than 100 points. Three of those days occurred last week. This increase in volatility reflects the uncertainty in global markets and is likely to persist for the near term.

Small and mid cap stocks remain favored. Historically these stocks tend to be more volatile than the large cap stocks found in the DJIA, and last week was no different. Expect a little extra volatility in these stocks going forward for now. My favored sectors remain Real Estate, Consumer Discretionary, Information Technology, Materials and Financials. These sectors also experienced greater volatility than the DJIA and will likely continue to do so. It remains imperative to remain focused on a longer-term perspective and not overreact to short-term, daily fluctuations. If these sectors lose relative strength, they will be replaced by stronger sectors at that time.

International stocks, while still favored, must be watched very closely. I continue to favor Turkey, South Korea, Thailand, Brazil and China. I am watching Thailand closely given the current political unrest, and China because of the efforts underway by the central government to prevent that market from overheating.

I will be looking to reduce exposure to British Petroleum given BP's ongoing exposure to the Gulf spill. Gold and precious metals are showing positive momentum and will be considered for portfolios.

I still prefer US Corporate Intermediate-term Bonds and International bonds in the fixed-income area.

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.