Wednesday, May 2, 2012


Markets here at home moved up nicely last week on continued good earnings news. Through the end of last week, 300 companies of the S&P 500 have reported earnings and 70% came in ahead of estimates. However, the Department of Commerce's initial estimate of the 1st Quarter Gross Domestic Product (GDP) came in at a disappointing 2.2% declining from last quarter's 3.0% and missing the consensus expectation of 2.5%. A drop in government spending contributed to much of the decline as did a pullback in business investing. Consumer spending was a bright spot, but with incomes advancing slowly, economists are concerned about whether consumers can continue to maintain spending at this pace. Initial jobless claims also came in higher than anticipated at 388,000 and marks the second straight week of growing first time jobless claims. All of this had Fed Chairman Bernanke stating yet again that he would take action (quantitative easing) if the economy slowdown worsened, but he did not think that action would be necessary now.

With just one trading day left in April, the Dow Jones Industrial Average (DJIA) was up 199 points (1.53%) for the week and has managed to move positive for the month (0.12%), and is now up 8.27% for the year. The S&P 500 gained 1.80% for the week and is now up 11.59% for the year. The Russell 2000 added 2.66% for the week and the tech-heavy NASDAQ gained 2.29%. For the year the Russell 2000 is up 11.41% and the NASDAQ is up 17.81%.

All the major economic sectors were positive last week led by Energy, Consumer Discretionary, Real Estate, and Information Technology. Consumer Staples, Health Care, and Materials were the bottom three sectors, but as I said, all posted positive gains for the week.


Europe remains a major concern. Standard & Poor's downgraded Spain's debt two notches raising concern through European markets. Great Britain is in a mild recession and Spain is expected to release their GDP figures showing that country is again in recession. Spain's unemployment has also reached a staggering 24.4%. The French election is just over a week away and the Socialist Francois Hollande is expected to displace current president Nicolas Sarkozy. Mr. Hollande's stated agenda will place a great deal of strain on French and German relations. Not surprisingly, the European-heavy MSCI EAFE index lagged the US markets by gaining just 0.68% for the week. For the month of April this index is down 2.07% and is up a modest 7.70% so far this year.


The Euro was virtually unchanged against the US Dollar adding just 0.30% to close at $1.326. The broader US Dollar Index which measures the US Dollar against a basket of six currencies (mostly European and heavily weighted towards the Euro) fell 0.55% and is down 1.83% for the year. Currencies in general have moved little if at all recently reflecting the great uncertainty about central bank activities. Much like interest rates, currencies today have grown increasingly dependent on the actions of central bankers and less on more traditional economic principals such as trade imbalances.

Gold and WTI oil were up 1.36% and 1.56% respectively last week, and the Dow Jones UBS Commodity Index (a broad basket of commodities) gained 1.98% marking its first gain in six weeks. Gold rallied primarily on the weaker US economic data (raising the probability of additional quantitative easing by the US Federal Reserve), and oil gained on speculation that the global supply of oil would not be artificially impacted by releases of the strategic oil reserve to help hold down prices.

Bond markets continued to move slowly upwards (pushing interest rates down) as economic data remained neutral to weak. I read a number of stories over the weekend of a major migration of investment dollars from the equity markets to the bond markets. This represents fear on the part of most investors, but also provides gains for bonds. The Barclays Aggregate US Bond Index was up for the sixth straight week adding 0.13%. So far in April the Barclays has added 1.09% and 1.42% for the year. The yields on US Treasuries have also fallen for the past six weeks and the 10-year yield stands at 1.931%. German, French, Italian, and even Spanish yields also fell. The German 10-year yield closed Friday at 1.699% and the Spanish 10-year at 5.881%. For the week, international bonds, preferreds, and high yield were the best performing of the bond sectors while the short duration and mortgage-backed bond sectors were the weakest. For the year, preferreds, international inflation, and municipal high yield lead all major bond sectors while extended duration US Treasuries and corporates are the weakest.


THE GROWTH VS. AUSTERITY CONUNDRUM

The European debt crisis has become an ongoing drama unfolding before us in Berlin, Paris, Brussels, Madrid, Athens, and Lisbon. European leaders have managed to stave off the most serious and immediate problems allowing the debate to now focus on how best to improve the economic growth prospects of the EU. The challenge, I believe, is that the patience of most European voters will be insufficient to see through the necessary structural reforms that will fix the real problem-national economies overly dependent on government spending which have been funding an unsustainable lifestyle.


The upcoming French election illustrates this problem. President Sarkozy has worked closely with German Chancellor Merkel to force austerity measures on the most guilty of EU countries like Greece, Spain, Portugal, Ireland, and to a lesser extent--France. The austerity measures, which are really cuts in government spending, have been painful in every country. Private unemployment in Europe has always been poor relative to the United States, and now government unemployment is surging. GDP's of most European countries have fallen and Spain has become the latest victim as Standard & Poor's cut the country's debt rating and has downgrade or placed on negative watch 16 major Spanish banks. Now the French look like they are going to throw restraint aside and elect a president who has called for the highest tax rate to be raised to 75%, a renegotiation of the current, but not ratified, EU treaty, and who wants the European Central Bank (ECB) to begin issuing Euro Bonds which the Germans and ECB strongly oppose. In other words, the French want a return to the good ole days of high government spending. The French also do not like that the prescription being pushed on the EU emanates from Berlin and not Paris. It is hard to undo hundreds of years of contentious relations!

What Mr. Hollande is proposing is to maintain the status quo of heavy government spending to subsidize the nearly 50% of French who work for the government, and apparently the French electorate has warmed to this idea. This will be confirmed next Sunday when the French vote for their president. What is lost in all of the rhetoric of Sarkozy and Hollande is economic reality. Regardless of who is elected, there will be little or no private money coming to France's or Spain's or Greece's government coffers to fund this modern European lifestyle. I believe Hollande understands this, which is why he is calling on the ECB to start up the printing presses and issue Euro bonds. The Germans have no appetite for the Euro bond concept because they will be on the hook for much of the new debt issued by the ECB.

European economies are contracting on the withdrawal of government spending. They have to. The short-term pain is terrible, especially for those most affected. But the lack of structural reform is keeping a lid on growth. Structural reform is another way of saying the Europeans must radically change labor and business laws. Labor laws in Europe are, in many cases, very rigid and uncompromising. Workers cannot be fired, minimum wages are extremely high, weekly work hours constrained well below 40 hours, and vacations are overly generous to name just a few examples. Regulations to start new businesses are excessive and complex designed to prevent new competition to existing companies. The Germans recognized that these issues were holding back their economy a decade ago and voluntarily implemented many pro-growth structural changes that has made Germany the economic powerhouse it has become. Now it is time for the rest of Europe to step forward and do the same. Unfortunately, if the French elections are to be any indication, it looks like the Europeans are opting to delay the inevitable.

LOOKING AHEAD


The French presidential vote is May 6th and I believe the Socialist, Francois Hollande, will be elected. I also believe that this may lead to another round of instability in Europe. I say "may" because the financial markets could step in and derail much of Mr. Hollande's desired reforms before they can be undertaken. This mess is one of the principal reasons why the International asset category remains fourth of the five I follow on a relative strength basis, and why I have been recommending very limited exposure to this asset category.

The announcement of the 1st Quarter GDP numbers disappointed and indicates the the US economy is slowing. Investors will be watching the economic reports this week for confirmation of this slowing. Personal Income and Outlays will be released on Monday morning, the ISM Manufacturing Index on Tuesday, the regular Initial Jobless Claims on Thursday, and the all important April Employment Situation on Friday morning. Consensus calls for personal income to rise slightly, manufacturing to contract very modestly, initial jobless claims to fall by 10,000 but still remain at


a high 378,000 level, and for non-farm payroll jobs to grow from last month's growth of 120,000 to 165,000. The unemployment rate is also expected to remain at 8.2%. Surprises either way can possibly impact the stock markets. Otherwise, I believe we will continue to muddle along.

For now, my views about the markets developed through the Dorsey Wright & Associates (DWA) relative strength analysis is unchanged. US stocks remains the strongest asset category followed by Commodities, Bonds, International stocks, and Currencies. US stocks retain a very sizable lead over the other categories with the others clustered closely together. Mid-capitalization stocks are favored, growth is favored over value, and equal-weighted indexes are favored over capitalization-weighted ones. On a relative strength basis, DWA puts Consumer Discretionary, Information Technology, and Financials as the three strongest economic sectors. The New York Stock Exchange Bullish Percent (NYSEBP) fell again last week and remains in a six week negative trend. The current reading of 66.09 is down from the high of 76.04 reached on February 17th.

I fundamentally believe that US equity markets today are the strongest place to be invested in for those who own stocks. I am cautious, however, because the NYSEBP has started to contract and this has been reflected in a sluggish stock market in April. If the DJIA closes below 13,212 on Monday it will be the first negative month for the DJIA since October 2011. Even if the DJIA manages to close above 13,212 it is unlikely to be a stellar month. Markets never travel in one direction for long and this may just be a pause, but diligence is called for.


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 financial events and situations.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, including international economic, political and regulatory developments.

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.

TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

As always, if you have any specific questions on your portfolio or wish to talk to me, please do not hesitate to call.

P.S. If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

Sincerely,






Paul Merritt, MBA, AIF ®, CRPC ®
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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