Friday, April 29, 2011

Spring into Shredding during May

Spring is in the air and tax season has finally passed. As the flowers come into bloom and the temperature ticks upward, you may experience a feeling of renewal. That’s often what spurs people to do their spring cleaning—and it’s a great idea. Why not take advantage of the service we offer here at NTrust Wealth Management?

Bring in your documents during the month of May and we’ll be happy to shred them for you.

Stacy L. Long, CFP®, AIF® Principal

Securities and Advisory Services offered through Commonwealth Financial Network(R), Member FINRA/SIPC, a Registered Investment Adviser.

NTrust Wealth Management | 780 Lynnhaven Parkway | Suite 190 | Virginia Beach | VA | 23452

Monday, April 25, 2011

Stock markets posted gains here and around the world last week as investors were buoyed by strong 1st quarter earnings here in the United States and investors shrugged off Standard & Poors revision of the US government's credit rating.

For the week, the Dow Jones Industrial Average (DJIA) gained 164 points (+1.33%) to close at 12,506 and the S&P 500 gained 18 points (+1.34%) to close at 1337. The markets began the week with a 148 point (-1.14%) loss on news that Standard & Poors revised the US government's credit rating from a "Stable" to "Negative" outlook. I will address this in greater detail below. Following Monday's selloff, the markets rallied the next three days in a holiday shortened week. The Russell 2000 added 1.28% for the week. As we complete the first 16 weeks of 2011, the DJIA is up 8.02%, the S&P 500 is up 6.34%, and Russell 2000 is up 7.64%.

Among the broad economic sectors, Technology staged a comeback finishing first followed by Materials and Energy. Telecom, Financials, and Consumer Staples were the bottom three. For the year, Energy, Health Care, and Industrials are the top three (Real Estate is just one hundredth of a percentage pint behind Industrials for the third place position), and Financials, Utilities, and Telecom remain fixed in the bottom for the year The good news is that all of the bottom three sectors are at least positive for the year. To put a slightly different twist in looking at how the broad sectors are performing, if you include the top four US market indexes into the mix, the S&P 500 Equal Weighted Index would be in the 3rd position while the DJIA would be 6th, and the S&P 500 and the NASDAQ would be 9th and 10th. Consumer Staples, Technology, Telecom, Utilities, and Financials all fall below the S&P 500 and NASDAQ so far in 2011.

The MSCI (EAFE) World Index gained 2.02% for the week and is now up 5.92% for the year. Japan's Nikkei Stock Index added a modest 0.95% last week and for the year is down 5.32%. Unfortunately, the economic news coming from Japan is not good as the ramifications following the series of natural disasters are taking their toll on the country. Of the 81 countries and country indexes I follow, Japan now ranks 76th for the year. In case you are curious, the United States ranks 36th just slightly above the middle of the pack. Developed and Emerging European countries continue to dominate the top positions so far in 2011.

European debt concerns moved off the front page of news last week and the Euro continued its gains against the US dollar. The Euro closed the week at $1.455 gaining just over a penny on the US dollar. For the year, the Euro is up nearly 9% against the dollar. The explanation of the Euro's strength is simple: demand is exceeding supply. The Fed's continuing support of an accommodative monetary policy and language that it will continue this policy into the foreseeable future has investors selling US dollars to move money abroad in search of higher interest rates. A weak US dollar is in turn pushing up the price of commodities everywhere.

Commodities, especially oil, all traded higher last week. West Texas Intermediate oil closed Thursday at $112.29 up $2.63 (2.40%) for the week as traders remain concerned about the fragility of the world supply situation in the face of continuing unrest in the Middle East. My personal gage of oil prices, as it is yours, is the price we pay for gasoline at the pump. This week I paid $4.15 a gallon for premium gas representing a nearly 20% increase in just seven weeks. My monthly fuel consumption has increased $40 per month since early March. If you recall in the first half of 2008 oil began the year at $95.98 and climbed steadily until it reached a peak of just over $148 per barrel in mid-July of 2008. By the end of 2008 oil fell over $100 to close at $44.60. The impact of these high prices, while severe, was mitigated by the rapid fall (yet again a reminder about the volatility of commodity prices) of the price of oil. So the question today is how long will these prices last? The answer will determine the eventual impact on the economy.

Gold has reached an all-time high closing last Thursday at $1503.80 reflecting a weekly gain of $17.80 (+1.20%). The explanation for this surge is pretty straight forward-investors are nervous and uncertain about world events and their impact on paper currencies. I also believe that there is a "bubble" mindset contributing to these gains. More and more investors feel like they need to "get in" as they watch prices continue to climb. I believe this is a dangerous reason to invest especially at these high prices. If you are interested in gold, it may be prudent to wait for a correction before stepping in. As much as gold has risen, silver has been quietly rising closing Thursday at $46.08 up 49.22% for the year.

One final thought on commodities. I have noted many times in the past that the weak US dollar is contributing to the general rise of commodities across the board. I continue to believe that this has been a significant part of the increase in prices. Watch the US dollar against international currencies and you will get a sense of how commodity prices may act.

The Barclays Aggregate Bond Index had another up week gaining 0.16% and is now up 1.14% for the year. The US 10-year Treasury yield moved down to 3.402% from the previous week's close of 3.411%. The news of Standard & Poors negative outlook for the US government did not shake bond holders as rates fell last Monday. The traditional relationship of bonds being a "safe haven" when equity markets pull back remains in place this year. Rates fell early last week and then rose as the stock markets rallied on earnings reports moving cash away from bonds and back into stocks. International bonds were the best performing bond sector last week (and this year) followed by preferreds, high yield, and corporates. Treasury Inflation Protection Notes (TIPs) fell slightly last week but remain one of the best performing bond sectors for 2011.

STANDARD & POORS' REVISION OF THE US GOVERNMENT BOND RATING

Last Monday, Standard & Poors released a report in which they maintained the US's AAA rating but revised its outlook from "Stable" to "Negative." In the report they stated that the US has a "one-in-three likelihood that we (Standard & Poors) could lower our long-term rating on the US within two years."

The reasoning behind this very rare move on the US debt rating (the first since just after Pearl Harbor in 1941) stems from the increasing percentage of current tax revenues used to pay interest on the debt, the size of the debt in relation to our Gross Domestic Product (GDP), and the increasing likelihood that Congress and the President are going to be unable to reach a compromise to effectively reduce the current debt levels. The first two issues behind this historic move are simple, straight forward, and based on quantitative figures. The last issue, which is an evaluation on the political struggles, is subjective, but is the most important. If American leadership fails to deal with this debt in a meaningful way, a downgrade to AA is sure to follow. That in turn will exacerbate what is already a bad situation and would have the immediate impact of causing the interest rates the US is required to pay on new debt to increase and will in turn reduce the value of existing Treasuries for all that hold them.

This outlook is shared by many of the investors in US debt. Earlier this month, China and other emerging markets have been suggesting that it is time to have either a new global reserve currency or to at least begin diversifying their holdings in US debt and further eroding the value of the US dollar. US monetary does matter to the rest of the world.

As I noted last week, the debate in Washington will not have an immediate impact on the markets (and this past week proved that point), however, the consequences of failing to reach substantive and meaningful reductions in the growth and size of the US deficit will have broad and serious consequences to the US economy and the standard of living enjoyed by every American. Federal Reserve Chairman Bernanke will be holding a first-ever press conference following the meeting of the Fed's Board of Governors on Wednesday. It will be very interesting to see what he has to say about issues such as the weakening US dollar, what will follow QE2, and how and when the Fed plans to move out of the current accommodative monetary policy to name just a topics on everyone's minds.

LOOKING AHEAD

My current investing guidance remains unchanged. I favor US stocks and commodities. International stocks also remain attractive, but country or sector selection must be carefully managed. Emerging markets outperformed developed markets slightly last week; however, developed markets in general have a slight advantage in 2011. I see no specific advantage this year between emerging and developed countries, so I support investing in the technically strongest international investments.

I continue to favor equal weighted indexes over capitalization weighted ones. Mid and small cap growth have been the strongest categories in the stock markets and remain over weighted.

I continue to favor Energy, Materials, and Health Care among the broad US sectors, but the narrow gap in performance after Energy and Health Care make most sectors attractive other than Financials.

Commodities and oil in particular, remain attractive in the face of the global uncertainties of supply and the weakening US dollar. Gold and silver remain as a hedge against the unknown both here and abroad.

Bonds remain steady and are providing minimal returns. International bonds have benefited by the flow of capital in search of higher yields, while the more risky bonds have done well in the US. I continue to like preferreds, high yield, floating rates, and corporates. Treasury Inflation Protection Notes continue to offer protection against higher interest rates.

The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.

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.

Emerging market investments involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.

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, this is a market capitalization weighted index, meaning the largest companies in the S&P 500 have a greater weighting than smaller companies. The S&P 500 Equal Weighted Index is determined by giving each of the 500 stocks in the index the same weighting in the index. 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. The Russell 2000 Index is comprised of the 2000 smallest companies within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.

Securities and Advisory Services offered through Commonwealth Financial Network(R), Member FINRA/SIPC, a Registered Investment Adviser.

Monday, April 18, 2011

Stock markets remained flat yet again this past week as investors search for clarity about inflation concerns, economic strength, renewed European debt concerns, and soaring commodity prices. US bond markets, however, had their best one week performance in 2011.

For the week, the Dow Jones Industrial Average (DJIA) lost 38 points (-0.31%) to close at 12,342 and the S&P 500 lost 8 points (-0.64%) to close at 1320. The markets lack of direction has been in place for the past six weeks. Since March 1st, the DJIA has added just 115 points (+0.94%) while the S&P 500 has lost 8 points (-0.57%). Contrast that to the previous three months (December 1st, 2010 to February 28, 2011) when the DJIA and S&P 500 gained 1220 points (11%) and 115 points (12%) respectively. Pundits and economists can debate the cause of each ebb and flow of the market endlessly, but let me sum it all up for you in one sentence: investors have no idea what to do! In other words, supply (selling pressure) and demand (buying pressure) have been balanced for the last six weeks as investors try to figure out what is going on. I will look at the major issues of the past week which may shed some light on why investors are uncertain about the direction of the markets, but until the buyers or sellers begin to take charge, this pause in the markets will continue.

For the year, the DJIA is up 6.60%, the S&P 500 is up 4.93%, and the Russell 2000 is up 6.55%.

Broad economic sectors reflect the uncertainty of investors. Last week's worst performer, Real Estate, was this week's top performer. Consumer Staples and Health Care remained in the top three. The year's top performer, Energy, was the worst performer along with Materials and Financials. The general sell-off of some commodity and commodity-related stocks hurt the Energy and Materials sectors. For the year, Energy continues to lead all other sectors by a wide margin followed by Health Care and Industrials.

The MSCI (EAFE) World Index lost 1.10% for the week and is now up 3.82% for the year. Japan's Nikkei Stock Index lost 1.81% last week and for the year is down 6.2%. Developed markets out-performed emerging markets and now lead emerging markets slightly for the year. For those of you who read the Update regularly, you are seeing a pattern emerging in the international markets, or should I say a lack of a pattern. There has been no consistent advantage in 2011 to be in either Emerging markets or Developed markets.

The Euro pulled back slightly last week against the US dollar over growing concerns that the European debt crisis may be reemerging. The Euro closed the week at $1.443 losing one-half cent to the US dollar. Concerns grew last week in Europe over Greece's ability to meet debt obligations even after last year's bailout. European Union (EU) leaders are strongly opposed to restructuring Greece's debt (defaulting on existing debt and replacing with new debt that may not make existing bondholders whole); but the German's are floating the idea. The EU wants to avoid restructuring at all costs because their leaders fear that this move would hurt all European bonds. Part of the motivation behind the German's consideration of restructuring is because Chancellor Merkel is facing enormous political pressure at home. Ms. Merkel's Christian Democratic Party has been losing key local elections around the debate over Germany's nuclear energy policies following the destruction of the Japanese reactors, and because German's are growing increasingly discontent about bankrolling countries they believe have been irresponsible in their spending. The yield on Greek 10-year bonds has risen to beyond 13% and, maybe even more worrisome, the cost to insure Spanish debt has been creeping upwards. I will continue to monitor this fluid situation closely.

Except for precious metals, commodities saw a pullback last week. West Texas Intermediate oil closed Friday at $109.66 down $3.16 (2.78%) for the week as traders focused on some generally positive economic news here in the US as the core Consumer Price Index (CPI) rose just 0.1% for the month and consumer confidence was up as well. At the same time, I paid $3.99 for a gallon this week for premium gasoline as gas prices surge across the country. March saw gasoline prices rise 5.6% for an annualized inflation rate of nearly 70% (fuel and food prices are excluded from the core CPI data). Gold prices reached record levels and closed the week at $1486.00 up $11.90 (0.81%) as investors seek protection against the growing uncertainty both here and abroad about inflation levels and currency valuations.

The Barclays Aggregate Bond Index had its largest one week gain in 2011 closing up 0.85%. For the year the Barclays is now up 0.98%. The US 10-year Treasury yield moved down to 3.411% compared to last Friday's close of 3.576%. The core CPI rate strongly influenced bond investors as they believe that real inflation is not a near-term risk. Long maturity treasuries were the best performing bonds last week as would be expected. International bonds continued to perform well as did treasury inflation protection notes (TIPs) and high quality corporate bonds. For the year, international TIPs and treasuries, high-yield, and preferreds have been the best performing bond categories.

PLAYING CHICKEN WITH INFLATION

The US Consumer Price Index for April showed a rise in core prices of just 0.1% and is up 0.5% on a seasonably adjusted rate. The CPI is up 2.7% on a year-over-year basis which I believe is within the guidelines of what the Federal Reserve would consider acceptable. Even though the core CPI increase was low, energy prices surged 5.6% and food increased 1.1%. While these numbers are excluded from the core rate because of the volatility of commodity prices, they still impact each and every one of us who must consume gas and food each day. Wage growth is flat so extended high energy and food prices will eventually translate into reduced spending by consumers in other sectors.

In Europe and the Far East, inflation is a much bigger immediate concern. At the International Monetary Fund's semi-annual meeting in Washington, DC, this week, the Chinese representative said inflation was his country's number one economic concern. To back up those words, the Chinese just announced a few hours ago that they were going to raise the bank reserve requirement yet again 0.5% to 20.5% in an effort to reduce liquidity in their banking system. This move has been coupled with a series of increases in their short-term federal interest rate.

Also at the IMF conference, a sharp divide has developed between developed and emerging countries over capital flows into emerging markets. Emerging market countries are upset with the United States for its extraordinary accommodative monetary policy which has resulted in a flood of cheap US dollars around the world causing the price of commodities and other goods to skyrocket. This has created inflationary pressures in those countries and places enormous pressure on local governments to fight inflation by raising interest rates curbing economic growth. So it is understandable why emerging market governments are not happy. Emerging market countries blame the US and the Federal Reserve in particular for allowing our own domestic policies to override the importance of having a credible monetary policy for the world's reserve currency. The United States counters this criticism by saying that many countries (China in particular) artificially control their currencies to protect their exports. US Treasury Secretary Geithner said that capital flows between countries would be balanced if currencies were allowed to fluctuate. I believe Mr. Geithner is correct in his belief, however, I also believe that the leaders representing the emerging market countries are also correct in their views that we are keeping our currency cheap by the Federal Reserve's monetary policies (low interest rates and QE2). Because the US dollar is the world's currency reserve, our policies (like it or not) have an enormous influence on the rest of the world. If the US fails to act responsibly, then other countries will look for an alternative to the US dollar as the reserve currency. Whether or not that is practical or even possible is for later debate.

In the meantime, the Federal Reserve is playing a game of chicken with US monetary policy. I strongly believe that much of the stock markets' gains in the past six months have come at the hands of Mr. Bernanke's policies. If he get's it right and stimulates the US economy to growth and prosperity without inducing a spike in inflation, then we will all win. If, however, Mr. Bernanke cannot get the economy on solid footing before the onset of inflation, then we can expect tough economic times ahead. Investors are telling us by the sideways movement of the markets for the past six weeks that they have no idea how this game of chicken will be resolved. I include myself as one of those who has no idea how this will turn out. But I do believe that a degree of caution is warranted and that the relative strength tools I use will help provide answers about Bernanke's success going forward.

LOOKING AHEAD

I am sounding a bit like a broken record in that my basic recommendations have not changed over recent Updates. There simply has been no change to the relationships between stocks and bonds, US and International stocks, or Commodities and Currencies over the past few months.

I continue to favor US stocks and Commodities. I believe that international investments should be closely evaluated and only the strongest technical investments retained. I do not have a heavy bias towards developed or emerging markets; however, emerging European countries have been the strongest performers. Small and mid-capitalization stocks remain favored. Equal-weighted indexes are favored over capitalization-weighted indexes.

I currently favor the Energy, Health Care, and Materials sectors. I will continue to hold onto other sectors that I have bought because their performance has not warranted any changes.

I believe that inflation protection notes should be looked at closely for inclusion into portfolios along with international bonds and corporate bonds.

Commodities are a volatile asset class to invest in so expect wide swings. I prefer energy investments above all others; however, if you chose to invest in other commodity vehicles I would encourage you to invest in a broad basket of commodities rather than try to pick between specific commodities. I still like gold as a hedge against the uncertainties facing investors today. Silver is also performing well and is currently at 30-year highs.

The markets have a lot to digest in the coming weeks. We have begun the earnings reporting season for the 1st quarter and all eyes are on corporate bottom lines. Europe will continue to be interesting and I am anxious to see if there will be any impact of China's move to raise the bank reserve rate on markets. And finally, there is the on-going political debate here about the size of the US debt, tax levels, and government spending. The outcome of these debates will affect all of us, but I do not believe the impacts will be seen in the near term.

One final note. I want to express my sympathies to many of my neighbors in the Hampton Roads community who suffered serious damage last evening after we were hit with some of the most deadly spring storms seen in this region in 20 years. Fortunately, those of us near the ocean front of Virginia Beach were spared from the storm's serious effects.

The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.

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.

Emerging market investments involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.

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, this is a market capitalization weighted index, meaning the largest companies in the S&P 500 have a greater weighting than smaller companies. The S&P 500 Equal Weighted Index is determined by giving each of the 500 stocks in the index the same weighting in the index. 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. The Russell 2000 Index is comprised of the 2000 smallest companies within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.

Securities and Advisory Services offered through Commonwealth Financial Network(R), Member FINRA/SIPC, a Registered Investment Adviser.

Thursday, April 14, 2011

Stock markets were flat in the US this past week while interest rates jumped on growing fears that inflation may be just off the horizon.

The Dow Jones Industrial Average (DJIA) gained 3 points (0.03%) to close at 12,380 and the S&P 500 lost 4 points (-0.32%) to close at 1328. In terms of the average daily point change in closing values of the DJIA, this past week was the second least volatile week of the year coming in at an average daily change of 30.22 points. This is also the third consecutive weekly drop after peaking for the year during the week of March 14th (135.26). For the year the DJIA is up 6.93% and the S&P 500 is up 5.61%. For the week, the Russell 2000 lost 6 points (-0.69%) and for the year is up 7.30%.

Broad economic sectors reflected the mixed returns of the major indexes. Consumer Staples, Health Care and Materials were the top performing sectors and all three outperformed the DJIA. Real Estate, Industrials, and Financials were the bottom three sectors. For the year, Energy leads all other sectors by a wide margin followed by Industrials and Health Care. Health Care has been steadily climbing up the ladder of best performing sectors so far in 2011. The bottom three performing sectors for the year are Utilities, Financials, and Information Technology.

The MSCI (EAFE) World Index gained 1.85% for the week and is now up 4.97% for the year. Japan's Nikkei Stock Index continued to rebound gaining 0.61% last week and has cut its yearly loss to 5.1%. Among stock exchanges, emerging markets in general were again the strongest performers of the week and as a group is regaining strength among the various asset classes. Europe, both developed and emerging markets, remain the strongest performers so far in 2011 around the globe.

The Euro surged last week against the US dollar after the European Central Bank announced, as they had been indicating, that it was raising interest rates from 1.00%to 1.25%. The Euro closed the week at $1.448 gaining 2 cents on the US dollar for the week and it is now up 11 cents (8.31%) for the year. This gain came after Portugal officially asked the European Union (EU) and the International Monetary Fund (IMF) for a bailout. This request had been expected and marks the third European country to seek assistance. The size of the Portuguese bailout is estimated to be €80 billion ($115.8 billion), but it is too early to know just how much will be ultimately needed. Pressure will now shift to Spain as potentially the next country in line for a bailout; however, initially it appears that Spain is getting a vote of confidence in the bond markets indicated by a narrowing spread between 10-year Spanish notes and German 10-year Bunds.

Commodities, especially oil, continued to rise dramatically. West Texas Intermediate closed Friday at $112.79 up $4.85 (4.49%) for the week, and is now up $21.57 (23.65%) for the year. Gold closed at $1474.10 up $46.00 (3.22%) and is now up $54.40 (3.83%) for the year. This sudden strength in oil and gold prices reflects the continuing concerns over the unrest in Libya, Syria, and Egypt; and fears of global inflation. While I have continually suggested that gold is primarily a hedge against uncertainty, the uncertainty that seems to be most in focus is that of the effects of high oil prices on the economies of the US and other countries.

The Barclays Aggregate Bond Index was off 0.31% for the week and this broad bond index is now down three weeks in a row. For the year the Barclays is still up 0.13%. The US 10-year Treasury yield closed up to 3.576% compared to last Friday's close of 3.445%. Rising treasury rates indicate that bond investors are now growing more and more concerned about the prospects of real inflation (especially as high oil prices persist), and concerns over the ever growing supply of new US bonds as the federal government continues to fund its current fiscal debt estimated to be $1.6 trillion. Not surprisingly, inflation protected bonds were the best performing bond category last week.

REFLECTIONS ON THE 1st QUARTER

After getting off to a strong start to the year in January and February, the DJIA and S&P 500 have started to trade sideways in March and April. March brought significant volatility within a month that changed little. So far in 2011 there have been 13 days were the market closed 100 points above or below its previous day's close, and 8 (62%) of those days were in March.

The story of the first quarter has to be the surge in oil and other commodity prices. I have discussed this phenomenon in previous Updates as I commented on how the Fed's very accommodative monetary policy (low interest rates, bond buying by the Federal Reserve-QE2) has kept the US dollar very cheap vis-à-vis other currencies and has been a major factor in higher commodity prices worldwide. But in the case of oil, the unrest in the Middle East has caused investors to hedge against the fear of supply disruptions and also contributed to push prices well over $100 per barrel.

The second major story of the quarter has been the strength or weakness in the US economy. The 4th Quarter, 2010, Gross Domestic Product (GDP) reached just over 3%. The unemployment rate has persisted around 9% and home prices continue to fall. Corporate earnings have been the one real bright spot and contributed to the strength in the stock markets (along with the Fed pumping cash into the economy through QE2). I consider the jobless rate to be a key input to the Federal Reserve's decisions surrounding their actions going forward. With high unemployment, the Fed has maintained an extremely accommodative monetary policy and will be slow to tighten as long as unemployment remains high.

Europe has always been on my radar screen as I have commented frequently on the actions of countries like Germany and France as they try to change decades and even centuries of cultural behavior in less fiscally conservative countries. The bailouts of Ireland and Portugal were accompanied by the fall of political governments in those countries as well. The EU continues to struggle on how best to instill discipline in spendthrift countries. Chancellor Merkel of Germany, whose country will ultimately bear the bulk of the bailout costs, is under increasing political pressure at home losing a series of local elections as Germans are losing patience on their country's role as the EU's pocketbook. I follow Europe closely for two reasons. First, the EU is the second largest economic block in the world behind the United States, and problems in Europe impact on the rest of us. Second, it is illustrative to watch political leaders struggle with out of control spending and borrowing, hostile public labor unions, and efforts to change decades of bad habits. While I strongly believe that the United States is not Europe, there are certain parallels that make the positive resolution of their problems important lessons for the US.

Finally, looking at broad asset classes, oil and commodities have been the best performing asset classes followed by mid capitalization stocks, the S&P 500 equal weighted index, the DJIA, and small capitalization stocks. Energy, Industrials, Health Care, and Materials have been the best performing broad economic sectors. Treasury inflation protection bonds, international treasuries, and high yield bonds have been the best performing bond categories.

LOOKING AHEAD

My basic recommendations have not changed over recent Updates. I continue to favor US stocks and Commodities. I believe that international investments should be closely evaluated and only the strongest technical investments retained. I do not have a heavy bias towards developed or emerging markets; however, emerging European countries have been the strongest performers and I am looking for good investments in that space. Small and mid-capitalization stocks remain favored. Equal-weighted indexes are favored over capitalization-weighted indexes.

My favored sectors have changed. I am now favoring Energy, Health Care, and Materials.

I believe that inflation protection notes should be looked at closely for inclusion into portfolios along with international bonds and corporate bonds.

Commodities are a volatile asset class to invest in. I prefer energy investments above all others; however, if you chose to invest in other commodity vehicles I would encourage you to invest in a broad basket of commodities rather than try to pick between specific commodities. I still like gold as a hedge against the uncertainties facing investors today.

Finally, I would like to make the following observations. As I have said before, small and mid-capitalization stocks have been outperforming large caps for quite a period of time. While my indicators still support overweighting the smaller stocks, large caps have been quietly gaining strength and it is certainly worth adding some high quality large cap stocks to portfolios. Along with large cap stocks, health care stocks have also made a strong rebound recently. China has also been quietly making a comeback after underperforming in 2011.

The real key going forward into the 2nd quarter of 2011 will be the impact of continued high commodity prices on economic growth, growing inflation pressures, and the termination of QE2 (scheduled for the end of June) coupled with the Federal Reserve's ability to navigate the US economy as it reduces stimulative monetary policies. While I applaud the early strength of stock markets so far this year, I remain vigilant to the potential negative impacts facing markets.

The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.

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.

Emerging market investments involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.

The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.

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, this is a market capitalization weighted index, meaning the largest companies in the S&P 500 have a greater weighting than smaller companies. The S&P 500 Equal Weighted Index is determined by giving each of the 500 stocks in the index the same weighting in the index. 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. The Russell 2000 Index is comprised of the 2000 smallest companies within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.

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