Tuesday, May 24, 2011

US markets were all down modestly this past week while the US dollar and commodities rebounded. International markets were generally down with minor strength in some of the emerging markets.

For the week, the Dow Jones Industrial Average (DJIA) lost 84 points (-0.66%) to close at 12,512 and the S&P 500 lost 4 points (-0.34%) to close at 1334. Hewlett-Packard (HPQ) had a particularly bad week (-11.0%) followed by aluminum giant Alcoa (AA) which lost 4.9%. Smaller and middle capitalization stocks did not provide any relief with the Russell 2000 losing 0.79%. For the year the DJIA is now up 8.07%, the S&P 500 is up 6.01% and the Russell 2000 is up 5.79%.

The Energy sector rebounded last week to lead the 11 broad US economic sectors that I follow. Consumer Staples was the next best performer followed by Utilities, Real Estate and Telecom. Each of these sectors posted positive gains for the week. Information Technology, Consumer Discretionary, and Industrials were the bottom three and each lagged the DJIA. Apparel retailers were especially hard hit last week after Gap (GPS) announced that they were cutting full-year profits by 25% reflecting higher costs to manufacture clothing.

International markets posted a third week of losses this past week with the MSCI (EAFE) World Index dropping another 0.90%. This broad international index is now down 5.28% for May compared to a month-to-date loss of 2.22% for the S&P 500. For the year, the MSCI (EAFE) is up 2.67%. Emerging markets posted a slight gain of about 0.32% last week. Growing concerns about the Greek debt crisis is casting a wide shadow over most of Europe as fears mount that Greece will require some type of debt modification or restructuring as the private sector has signaled that it will not buy new debt without extreme returns. Spain is also getting negative assessments by bond investors going into Sunday's local elections. It is expected that the ruling Socialist Party will be drubbed making room for a center right party. National elections are scheduled for March of 2012 but it is unknown if the Spaniards' discontent for the status quo will carry over to the national socialist party. One of the issues concerning bond investors follows the discovery after another recent local election that local officials had hidden the true extent of debt. Since most of the debt is localized in Spain, this will be an important factor in the coming weeks and months.

The Euro was essentially flat against the US dollar gaining just one-half of one cent to close the week at $1.4116. Investors have been leaving the Euro and purchasing gold and US Treasuries as a defensive move in the face of the ongoing European debt concerns.

Gold was back in the news last week with a gain of $15.30 (1.02%) to close the week at $1508.90. As already noted, worries in Greece and the Euro Zone have prompted investors to seek the safety of gold. Silver continued to fall losing just over 0.5% for the week. Oil was unchanged holding at just under $100 per barrel. A broad basket of commodities showed solid gains last week adding about 1.6% from the previous week's valuation. Strength was found in agricultural commodities and base metals (i.e. lead and copper).

The Barclays Aggregate Bond Index posted its sixth straight week of increases gaining 0.23% for the week. This broad-based US bond index is now up 2.73% for the year. The US 10-year Treasury yield fell slightly from 3.172% to 3.146% last week on European worries and news following the release of the last Federal Reserve meeting minutes indicating that the Fed is likely to take a long time (2 years or more) to reign in its accommodative monetary. Treasury Inflation Protection Notes (TIPs) were hardest hit losing about 0.25% as investors expressed their belief that inflation would be relatively tame for the foreseeable future. Long-duration bonds again rallied on the low-interest rate outlook and worries over European bonds.

WHAT I AM SEEING BY WATCHING

The Hall of Fame New York Yankee catcher, Yogi Berra, is renowned for his ability to state the obvious with great insight. One of my favorite quotes of Yogi's is, "You can observe a lot by watching." Recently the technical indicators that I follow have been telling me that stock markets are starting to weaken, bonds are gaining strength, and that stocks are reasonably valued.

You may think that I am stating the obvious, because since the beginning of May, markets have managed to lose a couple of percentage points. True, but more importantly, I am seeing my primary risk indicator, the New York Stock Exchange Bullish Percent (NYSEBP) give its first "sell signal" since last May. US stocks are still favored, so I am not selling wholesale, but I do believe it is prudent to consider raising cash allocations within portfolios in reaction to this elevated risk level.

My bond indicator has been rallying lately and showing strength. There is still a way to go before bonds give a "buy" signal, but a floor has been found and demand is back in control.

When I say stocks are reasonably valued, I am looking at the past 10-week moving average of either a stock or an index and evaluating its current position within this band. Across the board, stocks have moved back down from an over-bought status to a more neutral position within its respective band.

So I am seeing a market that looks much like it feels but where risk levels are rising. Investors are reacting to the uncertainties found here and abroad, and until some of these uncertainties have been clarified, expect more of the same.

LOOKING AHEAD

The recent movement in the markets has not been enough to change my overall recommendations. Small and mid capitalization stocks remained favored over large cap stocks, growth is favored over value stocks, and US stocks are favored over international. It has been very difficult to find leadership among international markets. Countries ebb and flow in terms of performance and no one country or region has been dominate over the past several months. I focus closely on the technical scores of each international investment and am retaining those that are strong, and selling the weakest. If you have any questions about the scores of your investments, please give me a call.

Commodities remain a favored asset category and have generally strengthened in the last week or two, however, keep in mind that this is a particularly volatile asset category.

I have made no changes to my sector recommendations. I favor Health Care, Energy, and Industrials along with Real Estate and Consumer Discretionary. Financials stand out as the one sector to avoid and trails the health care sector return by over 15% so far in 2011.

Bonds have stabilized and are providing acceptable returns. TIPs have shown weakness recently due to the Fed's recent comments and weakening economic data. International bonds and corporate bonds are doing well as are high yield and preferreds.

The official kick-off to summer is this coming weekend with the arrival of the Memorial Day Holiday. I will not be publishing an Update next week. As we all enjoy our extra day or two off from work, I hope that you will take a moment to remember those who have given their lives in defense of our great nation.

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.

Tuesday, May 17, 2011

US markets were mixed while European markets continued to sell off under mounting pressure from Greece's debt problems. Commodities, like stocks, moved mostly sideways. In general, the week was bumpy but when the markets closed on Friday, there was little change from the previous week.

For the week, the Dow Jones Industrial Average (DJIA) lost 43 points (-0.34%) to close at 12,596 and the S&P 500 lost 2 points (-0.18%) to close at 1338. The losses on the DJIA were spread across several sectors including financials, industrials and technology. JPMorgan posted the largest weekly drop (-4.20%) followed by Cisco, Caterpillar, Microsoft, and Bank of America. Smaller and middle capitalization stocks did slightly better with the Russell 2000 gaining 0.18%. For the year the DJIA is now up 8.79%, the S&P 500 is up 6.56% and the Russell 2000 is up 6.64%.

None of the broad sectors did especially well, but Consumer Staples, Health Care, and Utilities were the top three and all posted gains of greater than 1% while Financials, Materials, and Energy were the bottom three. Among more narrowly defined sub-sectors mining and banking were down more than 4%.

International markets lost again this week with the MSCI (EAFE) World Index down another 2.15% for the week and is now up just 3.60% for the year. Emerging markets continue to show increasing weakness and as a general category is now underperforming developed markets by nearly 5%. The big four in emerging markets are all posting disappointing numbers so far in 2011. For the year, Russia is the best performing country up 4.49% followed by China which is up 2.45% while Brazil is off 7.85% and India is down 10.12%. Each of these countries is struggling with growing inflation worries and are responding by trying to reign in economic growth through a variety of strategies.

The Euro lost another 2 cents (-1.40%) against the US dollar closing Friday at $1.411. The Euro has given back 7 cents or 50% of its yearly gain on the US dollar so far in May. The Euro's difficulties center on growing concerns over Greece's debt problems and recent remarks by the European Central Bank president who signaled there would be no further increases of interest rates in the near term. The Euro's weakness and growing strength of the US dollar will certainly act as a partial brake on any significant rally in commodities.

After all the drama in commodities in the previous week, most commodities stabilized last week. West Texas Intermediate (WTI) oil closed Friday at $99.65 up $2.47 (2.54%) for the week on more fundamental concerns over global oil supplies. The Department of Energy reported that overall oil consumption in the United States is running about 1 million barrels a day less than just one year ago bringing daily consumption down to 18.16 million barrels a day. Clearly, $4 gasoline is having an impact on demand.

Gold gained a fractional $2.60 per ounce (0.17%) to close at $1493.60. Silver lost around 0.20%. For the year gold is up just over 5% and silver remains up approximately 18%. Commodities in general were up about 0.20% for the week and for the year a broad basket of commodities is down 1.57%. I am unsure if this is a pause or the beginning of a more substantial correction following two consecutive years of double-digit growth. As I discussed in detail last week I do know that this correction/pause in commodities is fairly typical and the majority of commodities are still trading in a positive trend.

The Barclays Aggregate Bond Index posted its fifth straight week of increases gaining 0.06% for the week. This broad-based US bond index is now up 2.49% for the year. The US 10-year Treasury yield rose incrementally from 3.155% to 3.172% last week. Bonds in general are benefiting from the sell-off in the commodity market and benign economic data indicating the the US economic growth appears to be tepid reducing the likelihood that the Federal Reserve will be raising rates any time soon. For the week, municipal bonds showed unusual strength leading the many categories of bonds. Preferreds and emerging market debt also performed well. International treasuries and US Treasury Inflation Protection Notes (TIPs) were the worst performers last week.

A QUIET WEEK

Last week was a relatively quiet week in US markets. Sideways markets are indicative of confusion or uncertainty among investors. There is not consensus about what is going on. This is not surprising given the mixed signals coming from economic data. The April Consumer Price Index (CPI) was released Friday morning and showed overall inflation up 3.2% year-over-year, however, the critical (from the Fed's perspective) core inflation data rose by just 1.3%. Gasoline has jumped 33% and as noted earlier, is pushing consumption down in the US. The bond market concluded (correctly in my opinion) that the Fed will not be raising interest rates here any time soon which is seen as a positive. Jobs data saw a modest gain in private jobs growth, but then the overall unemployment rate increased from 8.8% to 9%. The most concerning report to me was a report issued on May 9th by Zillow, Inc. showing that 28% of US homeowners are now underwater on their mortgages.. The internet home value company said that they expect home values to fall another 9% above the 3% they have fallen already in 2011 and that a floor on valuations will not occur until sometime in 2012. Housing will continue to be a drag on the economy.

On the international front the news has been more negative. China raised the reserve requirement for banks 0.5% in response to their April inflation report showing inflation holding around 5.3%. This increase raises the overall reserve requirement to 21% compared to 10% here in the United States. It is difficult to compare the US to China directly because the regulatory environment is very loose in China. Greece's debt problem is so dire that the European Union (EU) is going to be forced to come up with more cash to get Greece through the next few months. Even if the EU is able to arrive at economic and political solutions for now, the reality of the overhanging fear that Greece's debt may never be repaid remains. The private bond market has no interest in buying Greek debt and is demanding an extraordinary premium to compensate investors for the growing likelihood that Greece will be forced to default in some manner in the future. In the meantime, the economic strength of the northern European countries (Germany, France, and Finland) continues to increase while the southern countries (Spain, Portugal, and Greece) weaken. This good news-bad news story puts additional stresses on the EU.

When you mix all of this information together you get a jittery market with no clear direction.

LOOKING AHEAD

Three late breaking news stories may have an impact on the markets this coming week. First are reports coming from Israel on Sunday evening of three well coordinated attempted breaches of Israeli border crossings with Syria, Gaza, and Lebanon resulting in the deaths of at least 13. Oil markets are already worried about unrest in the Middle East and this news may easily overshadow the second news item being President Obama's announcement on Saturday that he was going to expand oil leases in Alaska, the Gulf of Mexico, and the Atlantic coast. When President Bush took a similar tact in 2008 the price of oil dropped dramatically in anticipation to this new supply. I am not expecting an immediate reaction in oil prices until all the details of this announcement are parsed by investors. The third story came early Sunday morning with the news that International Monetary Federation (IMF) chief, Dominique Strauss-Kahn, was arrested late Saturday evening for variety of charges stemming from an altercation with a chambermaid at his hotel in New York City Saturday afternoon. Mr. Strauss-Kahn is a leading candidate in France's upcoming presidential campaign and seen as a serious challenger to Nikolas Sarkozy's bid for re-election. This story may have a greater impact on France than the EU, however, the timing of this arrest adds to the uncertainty during this crucial stage of the Greek debt debates.

My overall guidance remains in place. US stocks and commodities are favored over International stocks, Currencies, and Fixed-Income. Small and mid-capitalization stocks are favored over large cap. I continue to favor equal weighted indexes over capitalization weighted ones.

Commodities remain a favored asset category, but I am watching these investments closely. If you are getting nervous about investments in this area, I would encourage you to revaluate your holdings and trim if necessary.

I have made no changes to my sector recommendations. I favor Health Care, Energy, and Industrials along with Real Estate and Consumer Discretionary. The sector that I continue to avoid is Financials-especially banking. The mortgage mess and housing market is far from fixed and banks with exposure to these losses do not look attractive.

Bonds are bonds. They are not providing any major gains so far in 2011 and there is no expectation that this will change. If you own bonds for income, you are happy. If you own bonds to avoid volatility in your portfolio value, you are happy. If you own bonds for capital appreciation, you need to be elsewhere. I prefer corporates and preferreds. High yield bonds are still strong on a relative strength basis. I also like international bonds as a protection against a weak US dollar. I do not like US Treasuries, especially longer duration bonds.

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.

Tuesday, May 10, 2011

Markets changed course and drifted downwards this past week following a sharp sell-off in the commodity markets. The US dollar gained strength upon mixed economic data and then was further buoyed by a report Friday in the German publication of Der Speigel that Greece was considering withdrawal from the EU (the report was flatly denied by the Greek Prime Minister).

For the first week in May, the Dow Jones Industrial Average (DJIA) lost 172 points (-1.34%) to close at 12,639 and the S&P 500 lost 23 points (-1.72%) to close at 1340. On Thursday the markets reacted very negatively to the weekly first-time jobless report which saw claims surge only to reverse course on Friday with a solid private sector jobs report for April. For the year the DJIA is now up 9.17% and the S&P 500 is up 6.65%. The Russell 2000 lost 3.69% for the week and is now up 6.34% for the year.

Among the broad economic sectors, Health Care, Telecom, and Utilities were the best performing sectors while Energy, Materials, and Real Estate were the worst. With the price of oil tumbling, it was not surprising to see the energy sector take a sizeable hit and it has now fallen to the second best performing sector for the year behind Health Care and just ahead Real Estate. Financials, Materials, and Information Technology are the bottom three sectors so far in 2011. Health Care, Energy, Real Estate and Industrials are all above the yearly performance of the DJIA.

The MSCI (EAFE) World Index lost 2.32% for the week and is up 5.88% for the year. Europe, particularly Eastern Europe has been the strongest performing region so far in 2011. The Middle East and India dominate the bottom performers. For the week developed markets slightly outperformed emerging markets and that relationship also extends for the entire year. Both categories have underperformed the United States.

The Euro lost 5 cents (-3.38%) against the US dollar marking the worst drop in US dollar terms for the year closing Friday at $1.431. For the year the Euro has gained 9.4 cents (+7.04%) on the US dollar. Two factors contributed to this drop, first concerns over Greece's debt situation started the sell-off, and second, investors who "shorted" the US dollar (shorting is when investors sell a security or currency-in this case the US dollar--in anticipation of continued losses) had to buy back the US dollar to prevent further losses. These two immediate issues overwhelmed more fundamental issues facing the dollar such as lower interest rates and fears of US policy makers failing to make tough decisions on the US deficit. The sudden strength of the US dollar also helped exacerbate the commodity sell-off.

Commodities suffered a steep drop last week. West Texas Intermediate (WTI) oil closed Friday at $97.18 losing $16.75 (-14.70%) for the week. This one week drop sliced off nearly 75% of oil's gains in 2011 and was the largest one week drop in US dollar terms in history. For the year, WTI oil is now up 6.53%. A report in the Wall Street Journal this past weekend highlighted the fact that many of the sell orders last week came in as a result of automated trades rather than from floor traders. Like the Euro sell-off, investors who placed bets (in this case that oil would continue gaining in price) began to sell to cover their losses once the selling started that contributed to the large drop. It is uncertain if this is the start of a full correction of oil prices or just an overreaction by oil speculators. I will discuss more about the technicals of commodities shortly.

Gold lost $65.40 per ounce (-4.20%) to close at $1491.00. Although not as severe as oil's losses, this drop represented a loss of nearly 48% of the year's gains. The sell-off in gold was precipitated by a correction in silver as this metal lost nearly 27% of its value. Clearly the speculators and short-term investors ran to the sidelines as precious metals sold-off. To keep this sell-off in perspective, silver is still up nearly 15% for the year.

Collectively the broad basket of commodities was down about 9% for the week and for the year remains up nearly 2% which reinforces two facts that I believe: first, investing in commodities is volatile, and second, for most investors it makes more sense to invest in a diversified commodity investment rather than focusing on just one or two commodities.

The Barclays Aggregate Bond Index posted its fourth straight week of increases gaining 0.60% for the week. This broad-based US bond index is now up 2.43% for the year. The US 10-year Treasury yield fell from 3.283% to 3.155% last week. The 10-year Treasury yield is now at its lowest level this year (pushing bond valuations upward). The bond market benefited by the rise in the US dollar (safe haven as the Euro faltered) and fears stemming from the commodity markets which in their own way signaled that inflation may not be an immediate problem. In turn this takes pressure of the Federal Reserve to raise rates further comforting bond investors. Long-duration bonds were the best performing sector in the bond market followed by emerging market bonds, and high quality corporates. International sovereign debt bonds, preferreds, and high-yield bonds were the worst performing bond sectors. For the year, international sovereign bonds, Treasure Inflation Protection Notes (TIPs), preferreds, and high-yield bonds are the best performing bond sectors with short-duration bonds, emerging markets, and agency bonds the worst.

THE COMMODITY CORRECTION LAST WEEK

Everyone is asking, "is this the beginning of a full scale route on commodities?" As I scanned the flood of articles written on the subject in the financial media over the weekend I have to say most pundits simply don't know. So what do we know and how do we use that knowledge?

To start, we know that in some cases we had historic corrections. What we also know is that the commodity market acted as it has in the past. Commodity markets have always been subject to speculation. I do not mean speculation in a negative way, but rather in the sense that historically investors have had to make bets about the expected future direction of prices. What are investors speculating? In the case of agriculture, investors have worried about droughts, floods, famine, and fires. Sounds a bit biblical, but the challenges of farmers have really not changed over history; and investors who buy and sell farming products are making prices certain today while dealing with the uncertainty of tomorrow. This basic concept applies more or less the same to all commodity classes. I am greatly simplifying the process, but in general this is how commodity investing works.

Much of the speculation you see in commodity markets today is more akin to betting on the direction of prices by buying and selling commodity contracts (typically known as futures contracts) by investors who have no intention to own the commodity itself. These investors can magnify the gains or losses on commodities and create greater volatility in the day-to-day trading in commodities. I am not implying that these current day speculators are bad or that they should not be making commodity investments, rather I believe that there are very legitimate reasons for many of us to invest some part of our portfolios in commodities as a hedge against inflation. Any investment, commodities or not, can be overblown and behaviors can create bubbles when all value concerns are tossed aside in the name of getting in on a good thing.

I would argue that in the case of silver, this was a speculative bubble that has burst, for now. However, I would also say that when looking at the broad basket of commodities, the 9% drawdown was actually fairly typical. Since commodities bottomed out in December 2008, there have been six corrections of between 8% and 11% as commodities have risen to these current heights. So to invest successfully in commodities, you must be prepared for such volatility.

Getting back to the fundamental question, "what do I do now?" Do I sell my commodity holdings and take my profits, or hang on?

What I see is the overall trend for the broad basket of commodities remains positive. I also see that commodities have gone from being over-bought to over-sold. When comparing commodities to my five major asset groups (US stocks, international stocks, fixed-income, currencies, and commodities), commodities still rank #2. However, commodities also fail what I call the cash bogey. In other words, cash is now favored over commodities on a relative strength basis. In the past, this action alone would have knocked out commodities from my two favored asset categories, but recent adjustments to my methodology offers greater flexibility. So the answer to the question is: if you are risk averse, you should consider selling all or part of your commodity investments until commodities pass the cash bogey check. Otherwise, stay the course for now.

Let me expand on the adjustment to my methodology. When using relative strength as the primary tool to make buy and sell decisions, I must recognize this tool's limitations. One of the major limitations is that we can get into a situation like we are today where failing the cash bogey was always grounds to sell our holdings even though the investment is still in a long-term positive trend. This hard and fast rule work poorly when the markets quickly correct as they did during much of 2010. Likewise, this worked perfectly in 2008 when the markets tumbled and kept tumbling during the year. So I will look at your risk tolerance before making the decision to sell an investment while that investment is still in a long-term positive trend. If an investment gives a long-term sell signal, it will generally be sold.

A QUICK LOOK AT EUROPE

As those of you who have regularly read my Weekly Update know I have never let the debt problems in Europe stray far from my gaze. I monitor Europe because if the European Union (EU) and Euro rise or fall dramatically it will impact us here in the United States. The situation in Greece is reaching an important interim climax in how the EU will ultimately deal with their debt crisis.

The initial plan to deal with Greece's debt was for the EU to come in and purchase €110 billion ($157 billion) of Greek debt to stabilize the government's balance sheet. The price for that bailout was Greece's adherence to strict austerity measures including spending cuts. It was thought that this initial bailout would set the conditions for Greece to come into the private bond market (as the Federal Reserve does each week) and issue another €30 billion in 2012 to meet expected needs. However, with two-year Greek notes yielding more than 23%, it is apparent that Greece will not be able to go back into the private bond market anytime soon.

The EU must decide how to deal with this. The Germans have quietly been pushing for a plan to extend the maturities on Greek debt by as much as five years, but the European Central Bank President, Claude Trichet, and the French among others are strongly opposed. Their fear is that by extending the maturities it would create a serious outflow of capital from the EU and put increasing pressure on Ireland and Portugal. The Germans do not want to restructure the debt because bondholders would receive less than face value on the bonds, and with the German government being the largest Greek bondholder in the EU, German taxpayers would be stuck with the bill.

Further meetings are scheduled and at some point this issue will be dealt with. What I do not believe will happen is Greece leaving the EU and returning to the drachma. That action would make Greek insolvent overnight and plunge the country into financial chaos.

LOOKING AHEAD

This coming week promises to be especially interesting. All eyes will be on the commodity and currency markets. I will be one of those watching these markets closely and if there are changes to be made, I will be on the phone with my clients.

I have not changed my overall guidance regarding US stocks and Commodities. However, it is important to review each commodity position in relation to your risk tolerance. Commodities did try to rise on Friday after the release of the positive US private sector jobs data, but the troubles in Europe muted that rally. Europe will continue to be volatile given the challenges with Greece, so I continue to suggest that international investments should be made in the most technically strong securities.

I continue to favor equal weighted indexes over capitalization weighted ones. While small cap investments have slightly underperformed recently, small and mid cap investments are still the strongest on a relative strength basis. I am aware of some improvement in the large capitalization space; however, good performance is mostly found in US corporations with strong earnings abroad.

When looking at broad economic sectors, the recent volatility has made it difficult to really favor one sector over another; however, I believe that Health Care, Energy, and Industrials are strongest and Real Estate and Consumer Discretionary are solid. To make it simple, the only sector I truly do not like right now is Financials, especially the banking sector.

I have already said enough regarding the commodity sectors. Investments here are volatile and investors must be prepared to react if this asset class continues to deteriorate.

Bonds have continued to make steady and unspectacular returns. Long term, I do not like US Treasuries and I would encourage you to read Bill Gross's recent monthly commentary titled "The Caine Mutiny (Part 2)"about why he does not own US Treasuries. I continue to like preferreds, high yield, floating rates, and corporates. International bonds, although a bit battered last week, remain an important investment alternative to US dollar denominated bonds. Treasury Inflation Protection Notes offer some protection against higher interest rates for now. Although long-duration bonds outperformed again last week as interest rates pulled back, I generally do not like this bond sector in the face of an expectation of rising rates at some point in the future.

I would like to make one final comment about last week. As everyone knows, our US special operations forces killed the worst terrorist since World War II. Over the 21 years I served in the US Army I had the privilege to witness the birth of the Special Operations Command and to work directly with a number of "operators" in several positions I held. Without a doubt, these men are the finest, best trained, and dedicated soldiers, sailors, marines, and airmen our country has to offer. Their success in a far-off land was not luck but the product of the attributes found in each of them and the resources our country gives to them. I stand in awe and admiration of these special men who dedicate their lives to our benefit. God Bless America!

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.

Tuesday, May 3, 2011

Markets continue to post gains on the news of solid corporate earnings and negative economic reports. The weakness of the US dollar has been dominating the headlines of most of the financial media over the past several days following the remarks of Federal Reserve Chairman Bernanke that he would continue to support an "accommodative" monetary policy for the foreseeable future.

For the week, the Dow Jones Industrial Average (DJIA) gained 305 points (+2.44%) to close at 12,811 and the S&P 500 gained 26 points (+1.96%) to close at 1364. The markets shrugged off the initial 1st quarter Gross Domestic Product (GDP) announcement that economic growth had slowed to 1.8% and that first time unemployment claims jumped unexpectedly to 429,000 marking the second week in a row that this statistic has been over 400,000. For the month, the DJIA gained 3.98% and is now up 10.65% for the year. The S&P gained 2.85% in April and is now up 8.43% for the year. The Russell 2000 followed suit gaining 2.32% for the week, gained 2.58% in April, and is up 10.42% for 2011.

Among the broad economic sectors, Real Estate, Utilities, Health Care and Industrials all bested the DJIA's strong performance last week. Materials, Consumer Discretionary, and Telecom were the bottom three but posted acceptable gains. For the year, Energy, Health Care, Real Estate, and Industrials have all topped the DJIA while Financials, Telecom and Utilities bring up the rear. Again, all sectors have posted positive gains so far in 2011.

The MSCI (EAFE) World Index gained 2.34% for the week, is up 5.58% for the month, and up 8.40% for the year. European countries dominated global markets in April with especially strong growth coming from Germany, Poland, Belgium and even Ireland. Peru, Egypt and Greece were the bottom three countries. For the week, developed markets decidedly outperformed emerging markets. For the month, the BRIC countries: Brazil, Russia, India, and China were essential flat or even slightly negative and underperformed many countries.

The Euro posted a very strong two and a half cent gain (+1.77%) against the US dollar closing Friday at $1.481 its highest level since July 2008. For the year, the Euro has gained over 14 cents (10.78%) on the US dollar. The story on the US dollar has two essential components-monetary policy and fiscal policy. The monetary policy is set by the Federal Reserve, and Mr. Bernanke's commitment to very low interest rates has sent investors flocking abroad to purchase higher yielding foreign bonds. The second component, which I highlighted last week, is fiscal policy. Investors are growing increasingly skeptical that the United States will resolve its growing deficit problem before the next presidential election in 2012. The ever growing supply of US bonds can eventually be expected to put downward pressure on bond prices (Econ 101 supply and demand principal) causing rates to rise. If investors lose their appetite for risk, this anticipated trend will be either slowed or even reversed.

Commodities continued their rise last week. West Texas Intermediate oil closed Friday at $113.93 up $2.63 (1.46%) for the week. April saw oil rise 6.84% and for the year oil is now up 24.90%. The story is the same as it has been for the past few months as a weaker US dollar, instability in the Middle East oil producing region, and an every increasing demand for oil from new consumers in China and Brazil contributing to the rise. I remain concerned that as oil prices remain high, consumers will have fewer dollars to spend in other parts of the economy causing the recovery to sputter. Whether oil prices continue to increase or remain at current levels, the central issue is the duration of these higher prices. The longer oil remains above $100 per barrel, the greater the negative impact on the US and global economies.

Gold gained $52.60 an ounce (+3.50%) to close at another all-time high this past week at $1556.40 per ounce. After losing $85.90 (-6.05%) in January, gold has gained $222.60 over the past three months with $116.50 of that gain coming in April alone. Gold is the currency of uncertainty and recent gains have come from the continuing decline of the US dollar and, I believe, a growing speculative demand as investors want to participate in the seemingly unstoppable rally.

I will repeat last week's observation about the broader basket of commodities. It is not a coincidence that as the US dollar's weakness deepens, the price of commodities continue to rise. I will also add another important point to keep in mind, commodities are very volatile. If investors suddenly lose their appetite for risk, they are likely to return to the US dollar and the upward trend in commodity prices could reverse sharply. Watch the US dollar against international currencies and you will get a sense of how commodity prices may act.

The Barclays Aggregate Bond Index posted its third straight week of increases gaining 0.67% last week. This broad-based US bond index was up 1.36% for the month of April and is now up 1.82% for the year. The US 10-year Treasury yield fell from 3.402% to 3.283% last week following a strong demand for Treasuries at the end of the week. The bond market likes subdued economic data and the slowing of the GDP in the 1st quarter calmed investors' fears of inflation and contributes to the belief that the Federal Reserve will not need to raise interest rates for the time being. International bonds were again the best performing bond sector last week (and this year) followed by long duration Treasuries, preferreds, high yield, and corporates. Treasury Inflation Protection Notes (TIPs) gained slightly last week and remain one of the best performing bond sectors for 2011.

THE ONLY GAME IN TOWN

Mr. Bernanke gave the first-ever press conference by a fed chairman following a meeting of the Federal Reserve Open Market Committee this past week. The press conference reminded me of what has become the essence of the modern political "debate," victory is measured not by scoring strong points against your opponent, but rather by avoiding mistakes. And that is precisely what Mr. Bernanke did, he said nothing we did not already know and did so without saying something he shouldn't.

After the hype leading up to the press conference , we are left with the reality of what the Fed is doing or going to do. What we do know is that Mr. Bernanke believes the economic recovery is proceeding at a "moderate pace," and that the labor market is improving "gradually." He acknowledges that commodity prices have risen significantly since last summer causing inflation to pick up; however, it is his judgment that the inflationary pressures are "transitory" and "longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued." Therefore the Federal Reserve will take QE2 (buying bonds) to its conclusion to the end of June and continue to target a federal funds rate of between 0 and ¼ percent.

I hate spending time dissecting what the Federal Reserve is going to do or not do. What it thinks about inflation today or tomorrow, and if there is going to be another round of quantitative easing or not. There are a lot more interesting topics in the news today like Donald Trump's colorful language, a royal wedding, or unfortunately the terrible news coming out of the south following the deadly tornado outbreak. Yet here I am, talking about Mr. Bernanke and the Fed. This is a necessity not a choice. In the total absence of any sound fiscal policy developments in Washington, DC, the Fed is the only game in town, and I do believe that his policies are having an enormous impact on financial markets here and around the world.

The discussion now is how successfully the Fed will transition from an extremely accommodative monetary policy to a more normal one. The first step has already begun. Bernanke has announced the end of QE2 on June 30th. Although not entirely clear, the Fed will continue to take the proceeds from maturing bonds within its inventory and purchase new bonds for an undetermined period. This is accommodative, but not nearly as much as the policy of creating new money to put into the economy (QE2). If the Fed stops reinvesting entirely, then this will be the next logical step to pull money out of the economy gradually. Next, the Fed could go so far as sell bonds in its portfolio. Selling bonds has the effect of reducing the supply of money in circulation. Finally, the Fed can raise the federal funds rate which acts as a break on economic activity. Raising rates will also be a powerful signal to global investors and may draw money back into the US dollar for investment within higher yielding investments here. All of these steps will impact stocks, bonds, commodities, which is why I am spending my Saturday afternoon writing about it.

Is Mr. Bernanke right when he says that oil prices and other commodity prices are transitory or that the GDP's dip is also temporary? I have no idea. Quite frankly, I do not believe Mr. Bernanke knows either. No one person has the ability to look into the future and predict what will happen. What I do believe is that if Mr. Bernanke is wrong, it will be a costly error in terms of reducing the value of cash, CD's, and other fixed-coupon investments. If there is any lesson to take away from all of this is that we must be flexible and adaptive investors. What works today is probably not going to work tomorrow. We must also keep our eye on the markets and have at least a basic understanding of macro economics and how these factors will impact investments.

LOOKING AHEAD

I am intrigued by the old market adage, "Sell in May and go away." On the surface there is an enormous volume of research that supports this saying. The Stock Trader's Almanac has an interesting chart which shows that if you invested $10,000 in the market on November 1, 1960 and sold on April 30, 1961 and followed that pattern all the way through 2010 you would have earned $609,852. If you invested $10,000 using the opposite strategy, you would have lost $379. While I do not believe that every year will fit this profile, I do believe that we should be aware of this fact and act accordingly if indicators warrant.

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. After yet another week of uncertain performance by emerging markets, it is clear that the tug-of-war between developed and emerging markets is undecided and it is difficult to do anything other than invest in the most technically sound 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 am aware of some improvement in the large capitalization space; however, good performance may be found in US corporations with strong earnings abroad.

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 bond-like 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. Although long-duration bonds outperformed last week as interest rates pulled back, I consider these too risky to own in the face of an expectation of rising rates at some point in the future.

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. This informational e-mail is an advertisement. To opt out of receiving future messages, follow the Unsubscribe instructions below.