Tuesday, August 3, 2010

The US equity markets posted strong gains in July as 2nd quarter corporate earnings reports come in strong despite economic data suggesting slowing growth.

For the month of July the Dow Jones Industrial Average (DJIA) gained 690 points (+7.06%) closing at 10,466. The S&P 500 kept pace gaining 71 points (+6.88%) closing at 1102. For the year the DJIA is up 37 points (+0.35%) while the S&P 500 is down 13 points (-1.2%) from its 2009 close. This past week the Dow gained 40 points and the S&P lost 2 points.

The MSCI (EAFE) World has continued to outperform the US indexes gaining 9.2% in July and is now down 6.7% for the year. The Euro closed the month at $1.3045 the first time the currency has closed above $1.30 since the end of April.

US treasuries closed Friday at 2.9052% a slight drop from last Friday's close of 2.998%. In addition to the gain in treasury prices for July, corporate bonds also posted small gains. Bond yields in general are reflecting a low expectation of inflation for the near term and can also be interpreted as suggesting growing confidence in the ability of companies to meet future debt obligations on the corporate side. As inflation continues to remain low, there have been a few voices that have come out this past week expressing concerns of deflation. St. Louis Fed Chairman, James Bullard, said there was a possibility that the US may be entering a period of slow growth and deflation-similar to what Japan has experience over the past decade. While most observers see a small chance of this occurring, it is something to watch closely. Deflation is particularly troublesome because consumers postpone purchases in anticipation of lower prices. This makes it more difficult for companies to generate profits and will have an adverse impact on stock markets.

Gold continued to lose ground and closed down for the week another $4 closing at $1183.90. Friday did see about a 1% jump in gold prices as buyers stepped in to take advantage of lower prices and as a hedge against softer economic growth. As I stated last week, I believe that gold can continue to be held in portfolios as a hedge against uncertainty.

Oil prices continued to bump along and ended July just about where it started the week at $78.95. Oil trading in Asia ahead of tomorrow's market open in Europe and the US has pushed the price up to $79.30. Analysts believe that this is due to some belief in moderate economic growth and the continued weakening of the US dollar.

CONTINUED STRENGTH IN STOCK MARKETS DESPITE MOUNTING DATA SUGGESTING A SLOW ECONOMIC RECOVERY

As I previously stated, July was a strong month for stocks in general.

I noted a number of factors last week about why I remain cautious regarding the markets and Friday's GDP report of 2.4% growth for 2nd quarter and a reduction of previous GDP numbers confirmed what the less than upbeat data reflected. Additionally, the weekly jobs report did little to give any hint of improvement in this important indicator; and consensus for July unemployment (report will be released this Friday morning) is for an increase to 9.6%. That being said, the markets are showing strength and have effectively shrugged off any negative economic news.

China released its manufacturing data today showing continued moderation. Their index works much like the US index and indicated a slowing in the rate of growth, but still expanding. As I write this, major Asian markets are all positive indicating that investors are now comfortable with moderate growth-in other words, the economies are still expanding albeit at a slower, but hopefully, sustainable rate.

LOOKING AHEAD

My major market indicators continue to favor Cash and Fixed Income and the New York Stock Exchange Bullish Percent (NYSEBP) gained 5% to close July at 53.34% with demand still controlling. With the NYSEBP at mid-field (from a range of 0% to 100%), the markets can be considered to be in a fairly neutral position. However, caution must still be exercised because Cash and Fixed Income are still showing greater relative strength to stocks.

I do believe that equity positions can be taken prudently and I am certainly doing so now. If and when stocks become favored, allocations will be increased. My focus remains on investments that reflect strong relative strength characteristics such as emerging markets, small and mid cap stocks, real estate, and fixed income.

For bonds I continue to favor high quality corporate notes and foreign sovereign debt. High yield bonds are attractive as they correlate to the stock market as well; and as investors become more confident in the economic outlook, they will accept greater risk with lending. One point of caution...small and mid cap stocks, emerging markets and high yield bonds all tend to have higher volatility than large cap companies and investment grade bonds. So keep that in mind as portfolio values surge up and down in the daily battle between the bears and bulls. Do not take on more risk than you are comfortable with.

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.

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