Wednesday, February 1, 2012

Markets completed the last full week of trading in January mixed. The first estimate of the 4th Quarter 2011 US Gross Domestic Product (GDP) came in at a below consensus 2.8% disappointing investors. For the entire year, US GDP
rose an anemic 1.7%. The European debt crisis was the main topic among international economic leaders in Davos, Switzerland, but little agreement on how to proceed. Attention will now turn to this week's European Union (EU) summit in Brussels. Lastly, the Federal Reserve Chairman, Ben Bernanke, announced that US interest rates would remain between 0.0% and 0.25% until at least 2014 on year longer than previously planned.

For the week, the Dow Jones Industrial Average (DJIA) posted its first loss of the year losing 60 points (-0.47%) bringing the yearly gain of this key index to 3.63%. The S&P 500 managed to eke out a small gain of just under one point (0.07%) and is now up 4.67% for the year. The more volatile Russell 2000 continued its winning ways adding another 1.81% and is now up 7.82% for 2012. The technology heavy NASNAQ leads all major US indexes with a gain of 8.08% for the year following another 1.04% increase last week.

Real Estate, Materials, and Industrials were the best performing sectors last week easily outpacing the DJIA. Telecom, Consumer Staples, and Utilities were the bottom three with Utilities still managing a positive return for the week. Through most of January, the best sectors have been Materials, Industrials, and Financials with Utilities, Telecom, and Consumer Staples the bottom three performers. As I said last week, last year's dogs are this year's heroes as investors have switched back to a decidedly "risk-on" mode for now.

International stocks continued to rally as it appears that the European Central Bank's (ECB) decision to offer low-cost liquidity to European banks through the Long-Term Refinancing Option (LTRO) is working to buy policy makers more time to find a solution to the more vexing and critical growth issue. Italy's debt financing costs have fallen significantly from the start of the year when their 10-year sovereign bond interest rate was 7.1%. As of market close on Friday, that rate has fallen to 5.9%. Of the big four continental European countries (Germany, France, Spain, and Italy), only Germany has seen its 10-year interest rate rise and that increase is just a few basis points (100ths of a percentage point). Emerging Market stocks continue to lead all major stock categories with an increase last week of 2.82% and as a category is up 12.21% for the year. The Asia/Pacific region leads the rest of the world while Developed Markets, although nicely positive, lag.

Commodities switched into high gear last week with the Dow Jones UBS Commodity Index (a broad-based commodity index) posting a 3.81% increase. News that the US Federal Reserve was expecting to keep interest rates at their very low levels for another year out to 2014 was the catalyst for much of the growth. Low interest rates here keep the US Dollar weaker than it might be otherwise, and this makes commodities cheaper to buy in the rest of the world pushing up demand and prices. Countering this currency-induced demand for many raw materials is the weakening global economy. Gold has strongly rebounded gaining $71.40 (4.29%) and ounce to close Friday at $1735.40. For the year, gold is up 10.76%. Investors are going back to gold as a safe-haven as yields on US Treasuries will likely remain almost non-existent for the foreseeable future. WTI Oil gained $1.10 (1.12%) to finish last week at $99.56. For the year, WTI Oil is up just 0.74%. Brent crude that comes predominantly from the North Atlantic and sets the price for two-thirds of the world's oil supplies is up 3.80% for the year. Investors are watching the tensions between Iran and the West very closely and any loss of supply from Iran or fighting will undoubtedly push oil prices higher.

The Euro gained for the second week in a row adding 2.8 cents to close at $1.322. Euro investors continue to be encouraged by the general drop in interest rates for Spain and Italy and in anticipation of progress at this week's EU summit. Recent strength is clearly on the side of the Euro as it led all major international currencies last week while the Japanese Yen was the weakest. The Brazilian Real and the Indian Rupee remain the best performing currencies in 2012 after posting moderate gains last week.

US bonds posted their best week of the year with the Barclays Aggregate US Bond Index gaining 0.57%. International bonds and US municipal bonds were the best performing categories while short duration/maturity categories trailed. When interest rates are factored in, most every bond category was positive for the week. For the year, preferreds, International Treasury Inflation notes, US municipals, and high yield are the best performing categories. Long duration/maturity US Treasuries is the worst. Chairman Bernanke's decision to suppress interest rates here in the US and step up purchases of longer maturity bonds will likely help stem some of the losses the longer-term US Treasuries have suffered so far this year.

ATTENTIONS DIVIDED

In case you missed it, the World Economic Forum convened this past week in Davos, Switzerland. This annual gathering of the world's financial elites

from both public and private sectors, developed and emerging markets, and academics of all types, is intended to provide a forum to discuss the important economic issues of the day and try to find a common path towards prosperity for all. Discussions this year focused on finding a solution for Europe's woes. Meanwhile, back here at home, the 4th Quarter, 2011 GDP statistics were released with a bit of a thud. And if that was not enough, talks continue in Athens to try and reduce the amount of privately held Greek debt. Investors' heads were on a swivel as they monitored the news from Davos, New York and Washington, and Athens.

I will begin by looking at some of the economic data from here at home. As I stated, the first estimate (there will be another estimate before the final GDP number is released March 29th) of the 4th Quarter 2011 GDP number came in at 2.8% bringing the 2011 GDP growth rate at 1.7%. Although the consensus quarterly number of 3.1% growth was not met, the underlying numbers were pretty much as expected-and that is the problem. First, much of the increase in manufacturing and production came in the form of inventory replenishment. This was anticipated, however, final demand (goods that are actually purchased at retail) was flat. Most economists believe this sets the stage for slower economic growth as manufacturers must now wait for their inventory to be sold to you and me before they replenish again. Government spending fell sharply as defense expenditures were slashed holding down GDP growth as well. Consumer spending increased at a very modest rate to 2% from 1.7% in the previous quarter. Any growth is better than no growth so there is something to cheer about; however, some segments of the economy look pretty bad right now.

The Commerce Department released their final 2011 report on US New Home Sales and that number is bleak. For the year, 302,000 new homes were sold in this country. This is the lowest number since the government started collecting this information in 1963. Even more concerning is the per capita data. Only 2.5 new homes were sold for every 1000 households in the US. This again is a record low. For most of the past 48 years this number has ranged between 6 and 9 households per 1000 and indicates just how week the new home market is. We have a long, long way to go before the housing sector contributes again to the GDP.

Unemployment is the other critical number. First time jobless claims have been trending downwards the past few weeks until last Thursday's report showed an increase of 21,000 raising the number to 377,000 for the week. This lack of job creation will dampen the little bit of consumer confidence that has been increasing as the jobs numbers improved. The January employment report scheduled for release this Friday will be an important indicator of the durability of the slow but steady jobs trend. Consensus calls for an overall drop in the number of new jobs created to 135,000 from December's 200,000. The overall unemployment rate is expected to remain at 8.5%.

Back to beautiful Davos. As the elites drank expensive wines and dined on 5-star fare, little of consequence emerged. I think German Chancellor, Angela Merkel, gave the most important speech. In short, she said Germany would not be an open checkbook for the rest of Europe and that countries like Greece and Portugal must get their fiscal houses in order. She also said that it was imperative that the Europeans agree to a more closely unified economic system with Brussels taking on what many perceive as sovereign economic authority from the individual countries. British Prime Minister Cameron was quick to publically push back from anything like an endorsement of that concept. So lots was said but no real solutions emerged on how to fix Europe.

Finally, there is story of the ongoing negotiations between the private bondholders of Greek debt and the Greek government. As I discussed last week, the successful outcome of these talks is crucial to the refinancing of Greek debt and any hope of economic stability in the Euro zone. All reports indicate progress continues to be made and there is some hope that a final agreement will be reached this week.

LOOKING AHEAD

The EU summit starts Monday in Brussels. Interest will be high to see what, if anything emerges from this summit. Additionally news from Athens, good or bad, could possibly the biggest driver of the markets depending on the outcome of the talks there. Here in the US, as I noted earlier, the unemployment figures will be closely watched for signs of improvement in the economy.

US Stocks continue to be the strongest of the five major asset categories I follow followed by Foreign Currencies, Commodities, Bonds, and International stocks. Mid-capitalization growth stocks remain favored from a relative strength standpoint among US stocks, while every major US economic sector has moved into a favored status.

The strengthening trend in the Emerging Market sector suggests that investment here may be warranted for more aggressive investors. Keep in mind that the International Stock asset category is still in last place, but for now, some exposure may be taken. My reservations regarding European stocks remains and I would avoid that area except in very limited circumstances.

Gold and precious metals have regained their top position among commodities. The negative trend in Commodities in general has prompted me to consider reductions in commodity positions, except for precious metals, but I am generally not in favor of eliminating all commodities from your portfolio if you already own positions.

The bond market remains attractive and I am not changing any of my recommendations for this asset category. I continue to like international bonds, inflation-protection bonds, and a mix of high-yield and high-quality bonds. I am also watching senior bank loan bonds and am considering these as part of my bond portfolios. The Federal Reserve's announcement that they intend to purchase more long maturity bonds may help to shore up the long end of the yield curve, so be alert. I generally favor the short and intermediate maturity bonds because they potentially have less volatility to interest rate moves.

In addition to the jobs reports coming Thursday and Friday, the ISM Manufacturing Index for January 2012 will be released Wednesday morning. Consensus calls for this index to increase again to make it four months in a row with an increase. As I noted in the previous segment, there is a lot of concern about the sustainability of GDP growth in the early part of 2012 so investors are watching reports like the ISM Manufacturing Index for an indication of how the economy is doing.

I am encouraged by the markets' progress in January but I remain cautious. The risks in the markets have not been subdued, but they have been mitigated for now. I maintain my conviction that riskier assets within the same broad asset category must be balanced with lower risk assets. It is just too early to tell how things will ultimately work out, so I am hedging my bets.

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.

Currencies and futures generallyare volatile and are not suitable for all investors. Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors' expectations concerning interest rates, currency exchange rates and global or regional political, economic or fi nancial events and situations.

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 Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. 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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