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.

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