Wednesday, September 19, 2012

Quantitative easing is once again part of US monetary policy following Thursday’s announcement by Ben Bernanke that the US Federal Reserve would begin another program to buy mortgage-backed securities.  Some form of easing was anticipated following recent statements by Mr. Bernanke indicating he was in favor of intervention; however, many economists did not expect the unlimited duration of this new policy.  This third round of easing (referred to as QE3) had an immediate and positive impact on stock markets and “Risk On” assets, and rippled through the remainder of other markets both here and abroad.  The net effect of the Federal Reserve’s action will be to pump more and more money into the economy, which, I believe, will push prices for nearly everything higher, and exert influence over the markets near term.  As I review the past week, you will see this QE3 theme affecting every major market and asset category.

For the week the Dow Jones Industrial Average (DJIA) added 287 points (2.2%), the S&P 500 gained 1.9%, the NASDAQ increased 1.5%, and the small and mid-capitalization dominated Russell 2000 led US indexes for the second week in a row adding 2.7%.  Historically September is the weakest month for stocks, but that has been anything but the case so far.  For the month, all of the major stock indexes are up led by the Russell 2000 that has posted a 6.5% gain in just two weeks.  The S&P 500 is up 4.2% followed by the DJIA and NASDAQ which are each up by 3.8%.  For the year the DJIA is now up 11.3%, the S&P 500 is up 16.6%, the Russell 2000 is up 16.7%, and the NASDAQ continues to lead with a 22.2% gain.

Utilities was the only major economic sector negative this past week as the “Risk On” theme hurt the more defensive sectors.  The other weak sectors last week were Consumer Staples and Health Care.  Energy, Materials, Financials, and Industrials were the best performing sectors and exceeded the DJIA for the week.  For the year, Financials is now the best performing sector followed by Consumer Discretionary, Information Technology, and Real Estate.  Utilities, Energy, and Consumer Staples are the weakest.  The Utilities sector, although positive for the year, has significantly underperformed the other sectors so far.

International stocks continued to rally this past week led by the Emerging Markets region that posted a gain of 4.3% for the week.  The “Risk On” theme sponsored by the Federal Reserve’s and European Central Bank’s (ECB) monetary policies has given a strong boost to international stocks both in terms of overall risk tolerance by investors, but also by weakening the US Dollar which helps international investment valuations here in the US.  The MSCI (EAFE) gained 3.7% and the European STOXX 600 index gained 1.3%.  In addition to the Emerging Markets region, the Asia/Pacific region also did well gaining 3.6%. 

The Barclays US Aggregate Bond index posted its second consecutive loss last week losing 0.43% as “safe haven” bonds were sold in favor of riskier assets.  The 10-year and 30-year US Treasuries were especially hard hit with yields jumping dramatically for both bonds.  The 10-year yield increased from 1.668% to 1.863% and the 30-year yield moved north of 3% to close last week at 3.089%.  This is the first time since May 4th that the 30-year US Treasury yield closed above 3%.  As with stocks, the key theme in the bond markets was “Risk On.”  For those who may not be aware of the diversity of the bond market, it is important to realize that the bond market is anything but a homogenous pool of like-style investments.  I track over 13 different bond sectors on a weekly basis from the ultra-conservative US Treasuries to riskier high yield bonds and preferreds.  Some bonds are sensitive to credit risk (the ability of companies to pay back their bonds) while others are sensitive to interest rates (the upward or downward movement of interest rates).  Still others are not even bonds.  The floating rate sector is not comprised of bonds at all, but rather bank loans that are made by banks to companies.  This past week the “Risk On” theme affected bond markets as safe-haven bonds like US Treasuries significantly underperformed for the week while corporate high-yield and preferreds did very well.  Bond sectors that provide investors some protection against rising rates like Treasury Inflation Protection Notes (TIPs) and floating rates also did well.  International bonds did well with the weakness in the US Dollar.

The US Dollar came under considerable pressure after the Fed announced the terms of QE3.  As I have said, the net result of QE3 will be an increase in the supply of cash, and the more cash you have in the economy, the less valuable it becomes.  The US Dollar Index fell 1.8% this past week and was the worst weekly performance by the index in 2012.  The Euro gained 2.5% against the US Dollar to close last Friday at $1.313.  This was the largest weekly percent gain in 2012 and marks the highest Friday close for the Euro since late April.

A weak US Dollar drives commodity prices higher and this was certainly the case last week.  The Dow Jones UBS Commodity index gained 3.2% and is now up 4.1% in September.  Gold added another $29.50 (1.7%) per ounce to close Friday at $1770.00.  Gold is up $82.40 (4.9%) this month as central bankers around the world have announced they will print more money.  Oil also increased $2.66 (2.7%) to close Friday at $99.03.  Worries over escalating tensions in the Middle East are partially responsible for the increase in oil; however, the weakening US Dollar is also a major factor in rising oil and commodity prices.  For the year, the Dow Jones UBS Commodity index is up 8.1%.

QE3 AND ITS IMPLICATIONS FOR INVESTORS

I will attempt in a limited space to explain QE3 and the ramifications it may have on investors.  I have already spent time recently discussing central banks and their role in setting monetary policy and thus influencing economic policy both here and abroad.  If you did not read the past three or four Weekly Updates, I would encourage you to go back and review the middle sections.

So what exactly did the Federal Reserve do with QE3?  Three things actually.  First, Chairman Bernanke said that the Fed would keep the Federal funds rate low (0.0% to 0.25%) until mid-2015 (an extension of another year); second, the Fed is continuing Operation Twist (buying longer-duration Treasuries as short-term Treasuries mature) until the end of 2012; and third, the Fed is going to begin purchasing $40 billion of mortgage-backed securities per month indefinitely until the job market improves.  The Federal Reserve’s statement on Thursday said this move “should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” The net result of this extremely accommodative monetary policy is to push cash into the economy with the expectation that all of this money will help stimulate economic activity and ultimately drive down unemployment.

For investors, I believe, this means that the “Risk On” trade is back and the risk of future inflation has been increased.

The concept of “Risk On” and “Risk Off” scenarios emerged as a dominant theme in the post-Lehman Brothers bankruptcy era and ensuing financial crisis.  This past April, HSBC published a paper authored by Stacy Williams, Daniel Fenn, and Mark McDonald titled, “Risk On – Risk Off, Fixing a Broken Investment Process.”  In their outstanding report, the authors conclude that long-standing investment principals used by most asset managers have been challenged by the extremely high correlation of asset classes in the past three years.  In the past, it was assumed that different asset classes had different correlations and therefore provided investors benefits through diversification.  Since the start of the financial crisis, the degree with which asset classes move together (correlation) has increased dramatically and securities trade, not on their own fundamentals, but on the market’s perceived levels of current risk.  According to the paper’s authors, the cause of this new phenomenon is primarily attributable to “a new systemic risk factor.”  They see this new systemic risk factor coming directly from “global intervention, QE and policy response of an unprecedented scale across many countries—and markets are pricing in the bimodal nature of consequences.”  In other words, massive intervention by central banks and governments in the global economy has distorted traditional economic relationships and there is great uncertainty about whether these interventions will achieve the desired outcomes.  When investors feel like policy actions are positive (at least in the short term), we see the “Risk On” trade emerge, while pessimism leads to “Risk Off” trades.

It is also important to note that another factor associated with the “Risk On – Risk Off” theme is that movements tend to be event driven.  The announcement of quantitative easing or the Greek financial crisis are just two examples of this and in each case, investors are making judgments about the levels of systematic risk in markets.  With the “Risk On” trade comes strength in riskier assets: stocks, commodities, and some bonds.  Not all stocks or all commodities or some bonds will benefit by the “Risk On” trade but most do.  Defensive sectors, higher yielding stocks (which are seen as more conservative) may lag, for example.  However, the general trend is up, up, and away with prices.  Safe haven assets such as US Treasuries and the US Dollar will pull back.  This is what we saw happen this past week.

If traditional investment principals no longer work as effectively in the current “Risk On – Risk Off” environment, then what are investors to do?  The authors of the HSBC article describe four approaches to investing in today’s world.  I want to highlight one of the approaches they refer to as “Seek unaffected active strategies.”  They go on to say, “some active strategies, such as momentum, have remained largely impervious to Risk On – Risk Off.”  I fully support this conclusion and have for some time.  This is why I use the relative strength (RS) research provided by Dorsey Wright & Associates.  RS is a form of trend following and trend following is tied to momentum.  I believe RS is a sound tool upon which to make investment decisions.  When old school concepts no longer work or are no longer as effective, then it is time to adapt and move forward and that is what RS analysis does.

LOOKING AHEAD

Markets will continue to absorb the implications of QE3 and activities in Europe and elsewhere.  I agree with one of my favorite market observers, Scott Grannis (Calafia Beach Pundit), that the one thing for certain the Federal Reserve did last week was raise the probability of future inflation and make it more difficult for the Fed to step away from QE.  When inflation becomes a problem (and I believe it will some day), the Fed will have to pull money out of the markets and that traditionally requires unpleasant actions.  The more money into the market today the more that will be required to be removed and the more painful future moves will be. Offering a possible preview, Egan-Jones, one of nine nationally recognized statistical rating agencies announced last week that they were cutting the US’s credit rating for the third time from AA to AA- (the lowest rating among “high grade”bonds) citing the Federal Reserve’s continued monetary easing and debt purchases.  Eagan-Jones was the first ratings agency to cut the US credit rating back in July 2011.  It is too early to tell if any of the other rating agencies will follow, but it does provide some indication of how bond markets may eventually look upon the Fed’s latest actions.

After the busy week last week, this coming week has just a few economic reports due out.  Housing will be the focus on Wednesday as August Housing Starts and Existing Home Sales will be released.  Both reports are expected to show some modest increases from July’s data.  Initial Jobless Claims will be out Thursday morning.  Consensus is for 373,000 new claims, down from last week’s 382,000 increase.  The number remains too high and was likely one of the reasons that the Fed pushed for QE3.  The employment situation remains a real concern.

The New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 67.58 up from 62.56 up from 60.03 the previous week.  This important indicator about the general trend in US stocks has remained positive now for 14 weeks.  When the NYSEBP reaches 70, risk levels are becoming elevated.  It does not mean that a pullback is eminent, it is just that the risks of such an event are increasing.  Likewise, the S&P 500 is now overbought by 83% compared to last week’s 65% and the previous weeks level of 35%.  Corporate high yield, emerging market income, and US small cap stocks are the most overbought at this time exceeding 125%.  I believe that prices for these specific categories are high enough to hold off putting new money to work there.  After the past two weeks of gains, most categories (except bonds) are now overbought by 100% or more indicating caution.  Again, risk levels are elevated for now.

The Dorsey Wright & Associates analysis of the markets indicate that US stocks and Bonds are the two favored major asset categories followed by Foreign Currencies, International stocks, and Commodities.  Middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization weighted indexes.  Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks.  The relative strength sector weightings favor Consumer Discretionary, Real Estate, Information Technology, and Health Care.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.

Understanding how this market has become event driven and the potential for events to move markets, the next foreseeable “event” is the fiscal cliff.  Congress has just a week to do something before they go on recess prior to the November elections.  Much to do in so little time.  My guess is that we will just have to hope that a lame duck Congress can do something before we get into another fiscal crisis.  I do not think the Federal Reserve can do much more on the monetary side of the economic equation to save the politicians from themselves.

On a personal note, I will be taking next week off and not writing an update.  My daughter, LeeAnn, is getting married in Richmond on September 22nd and I will have the honor of walking her down the aisle.  I want to wish LeeAnn and her future husband, John Martin, great happiness and success.






Paul L. Merritt, MBA, AIF®, CRPC®
Principal
NTrust Wealth Management

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

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.
Emerging market investments involve higher risks than investments from developed countries and 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.  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 CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
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.
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 generally are 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.

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. 

 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 and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index.  The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise 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 Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US.   The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues.  It has a heavy bias towards technology and growth stocks.  The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index.  With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region.

Monday, September 10, 2012


European Central Bank (ECB) President, Mario Draghi, announced this past Thursday that he was prepared to initiate an unlimited amount of bond purchases in order to stabilize borrowing costs among European Union (EU) countries and protect the very existence of the Euro. Markets, both here and abroad, moved sharply upwards on the news. The weak August Employment Situation Report on Friday dampened investor’s spirits and greatly increased the expectations that Federal Reserve Chairman, Ben Bernanke, would undertake further monetary stimulus referred to as quantitative easing (QE).


For the week the Dow Jones Industrial Average (DJIA) added 216 points (1.6%), the S&P 500 gained 2.2%, the NASDAQ increased 2.3%, and the small and mid-capitalization dominated Russell 2000 surged 3.7%. Thursday was the key day as the DJIA jumped 245 points, and (Source: Wall Street Journal) without it, the DJIA would have been down 39 points for the week. Encouragingly, the DJIA and other indexes all managed gains on Friday in the face of the lackluster employment report. For the year the DJIA is up 8.9%, the S&P 500 is up 14.3%, the Russell 2000 is up 13.7%, and the NASDAQ is up 20.4%.

All eleven major economic sectors were positive last week led by Materials, Financials, and Consumer Discretionary. Only Consumer Staples, Utilities, and Real Estate underperformed the DJIA. For the year, the sectors ranked by performance: Consumer Discretionary, Information Technology, Financials, Health Care, Real Estate, Telecom, Materials, Consumer Staples, Energy, and Utilities. Only Utilities and Energy have underperformed the DJIA.

International stocks rallied on the ECB announcement last week with the MSCI (EAFE) posting a 2.8% gain. The European STOXX 600 index gained 2.3%. Developed markets (2.6%) led the major regions of the world followed by the Americas (2.6%), Emerging markets (2.5%), and Asia/Pacific (1.0%). The Far East continues to be hobbled by sluggish and disappointing growth numbers coming from China and Japan’s economic and political paralysis.

The Barclays US Aggregate Bond index posted its first weekly loss (-0.3%) in three weeks as US Treasury yields pushed higher for the week. The 10-year US Treasury yield closed Friday at 1.668% up from the previous Friday close of 1.543%. The 30-year yield also gained to close the week at 2.819% compared to last week’s close of 2.667%. Yields did fall slightly on Friday after the lackluster employment report and increasing expectation that the Fed will institute QE3, but uncertainty about how the Fed will implement QE3 and the move to riskier bonds following the ECB’s announcement dominated trading strategies for the week. Spanish 10-year yields fell sharply last week closing Friday at 5.36%. The yield on Spanish 10-year notes has now fallen over 1.9% from the July 20th close of 7.27%. Italian debt also pulled back. German sovereign debt yields, like the US, increased sharply as bond traders left “safe haven” debt and rushed to higher-yielding countries like Spain and Italy with the confidence that the ECB will step in and protect their bond purchases. Short duration international was the best performing bond sector last week while long duration US Treasuries and Corporates were the weakest.

The Euro jumped the past week to a four-month high against the US Dollar to close Friday at $1.281 up over two cents (1.83%) from last Friday’s close. The US Dollar weakened on investors leaving the safety of the US currency for riskier ones and because the poor employment report has increased the likelihood of another round of quantitative easing and the low interest rates this policy is expected to bring. The US Dollar index lost 1.2% for the week and is now down for the third consecutive week.

Gold and precious metals in general did very well this past week on expectations of QE3. Gold gained $52.90 (3.1%) per ounce to close Friday at $1740.50. Gold is the primary hedge against weakening currencies that are potentially devalued by easy monetary policies announced by the ECB and anticipated by the Fed. Commodities were generally higher last week with the Dow Jones UBS Commodity index gaining 0.8%. WTI Oil dropped negligibly to close the week at $96.42 per barrel. Corn was the biggest commodity loser of the seventeen I track losing over 11% for the week. Commodity prices tend to be very volatile week over week making it difficult to draw any hard conclusions about short-term fluctuations.

IS THIS A SUGAR HIGH?

Central bankers are doing their part to bail out spendthrift politicians. With Mario Draghi’s announcement on Thursday that he was prepared to enter into unlimited bond purchases in the secondary market to keep interest rates in check and preserve the Euro, he has bought politicians an undetermined amount of time to get the EU’s fiscal house in order. Since his initial comments in July supporting the Euro and his willingness to take action to preserve the Euro, interest rates have fallen sharply for the most at-risk countries in the southern sphere of the EU. Mr. Draghi’s announced policy was supported by every ECB Governing Council member except Bundesbank President, Jens Weidmann; but even German Chancellor Angela Merkel did not renounce the move. However, Germany was able to wrestle some important concessions from the ECB. First, a country will be required to formally request that the ECB begin purchasing its bonds in the secondary market. Second, there will be strict austerity requirements imposed as a condition for the ECB to buy a country’s bonds, and third, the ECB will buy only bonds with less than three-year maturities. These may prove to be important concessions wrestled by the Germans. Angela Merkel warned that the ECB’s unprecedented monetary accommodation could not take the place of political leadership (fiscal policy) to correct the imbalances between members of the EU.

Now it appears to most pundits that Mr. Bernanke will step forward and offer additional monetary policy accommodation following the weak jobs report for August. The Federal Reserve, unlike the ECB, has a dual mandate for price stability (inflation control) and full employment. It is the employment mandate of the Fed that makes most observers believe Mr. Bernanke will take action now. There is uncertainty concerning just how he will act. Will the Fed start a new round of bond purchases, will it talk down rates by promising to hold interest rates at near zero level for another year or two, or a combination of these and other measures?

Assuming Mr. Bernanke does act and Mr. Draghi begins to buy bonds, the ultimate question is will these policies be effective or will their efforts do little more than postpone the inevitable and do more harm in the long run? In other words, are we experiencing a sugar high or is the beginning of the end to the economic crisis gripping Europe?

The challenges are great—especially in Europe. Europe lacks monetary control over the countries within the EU and this issue is at the heart of a lawsuit challenging the constitutionality of German’s involvement in the permanent bailout facility known as the European Stability Mechanism (ESM). This Wednesday the German Federal Constitutional Court is expected to rule whether German leaders can give control over budgetary matters to the EU which the plaintiffs say is currently unconstitutional and precisely what would happen if Germany signs the ESM treaty. On the same day, the Dutch go to the polls for national elections. The outcome is being interpreted as a referendum in the Netherlands, for support of the Euro and of continued bailouts. If the Europeans are ever going to stem the current crisis and retain the Euro, I believe like many economists that there must be a fundamental reorganization of the EU focusing on fiscal and monetary centralization, the requisite loss of sovereignty by all countries in the EU, and approval of all these measures by the citizens of Europe. This must be done as Europe slips back into a second recession and unemployment reaches historical highs.

How much time the markets are willing to provide the political class is a critical unknown. Indicators such as European swap spreads and interest rates tell me that there is a cushion right now and that politicians have been given plenty of room to maneuver. Interest rates have plummeted in Spain and Italy, and it is expected that the private sector will step in and continue buying bonds as long as the ECB is buying as well. I believe that interest rates will remain the canary in the cave and will tell us if the private market approves or disapproves of monetary or fiscal policy initiatives, and I will continue to report that information each week. Much has yet to be done both here and abroad and the outcome is clearly in doubt.

LOOKING AHEAD

As I previously noted, the Europeans have several major events happening this week that are of real interest to investors. Here in the US, the 2012 presidential campaign is now in full swing and Congress is expected to be back in session. With vital issues facing the government, I am expecting nothing to happen in Washington until after the election. The Federal Reserve Open Market Committee (FOMC) will be meeting during the week and all eyes will be on Chairman Bernanke and whether or not QE3 will or will not begin and how it will be implemented if it is launched. The outcome of the FOMC meeting is very, very important to the markets and the economy in general.

This week has a number of important economic reports. The July International Trade figures will be released on Tuesday and consensus calls for a trade deficit of about $44 billion which is slightly higher than June’s $42.9 billion. Given the slowing global economy the export portion of this report will be viewed critically. Thursday is the weekly Initial Jobless Claims report and consensus is that 370,000 Americans will file first time jobless claims which would be up 5000 from last week. The August Producer Price Index (PPI) will also be reported Thursday morning. This report shows price increases to sellers of goods and services and thus reflects inflation momentum building within the economy. The PPI releases two sets of data, core and non-core with core stripping out food and fuel. I find the non-core most informative because food and fuel are key components to most of what the typical American buys each and everyday. Consensus expects the core rate to increase by 0.2% (0.4% in July) and the non-core rate to increase 1.4% (0.3%). If the non-core rate comes in anywhere near consensus, it could spell seriously higher prices for most goods and services in the fall. Friday has three important sets of data scheduled for release. First there is the August Consumer Price Index (CPI). The CPI measures the change in the average price level of a fixed basket of goods and services purchased by consumers. It is the measure of the rate of inflation. Consensus for a core basket is expected to increase by 0.2% (0.1% for July) while the non-core basket is expected to increase 0.6% (0.0% in July). The second report is the August Retail Sales figures. Consensus is for August to match July’s strong 0.8% increase. The last report is the August Industrial Production report. Consensus is for August to contract at a rate of -0.1% down from a good 0.6% increase in July.

The New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 62.56 up from 60.03 the previous week. This is the twelfth weekly increase of the past thirteen for this important technical indicator and has moved up from a low of 42.66 on June 4th. The overbought reading for the S&P 500 jumped last week and closed Friday at 65% up from last Friday’s reading of 35%. Still within a very acceptable range. I have consistently reported that bonds are overpriced relative to their values over the past ten weeks, but for most bond sectors, they are not extremely overbought. Except for corporate high yield which is currently overbought at 168%. This coincides with an article in the Wall Street Journal this past weekend reporting that high income bond yields are at their lowest point since this data was kept beginning in 1983. This translates to mean that investors are so starved for yield that their purchases have driven the price for high yield bonds to all-time high which in turn drives yields down (remember the inverse relationship between bond prices and yields). Exposure in this sector must be carefully watched for weakness.

The Dorsey Wright & Associates analysis of the markets indicate that US stocks and Bonds are the two favored major asset categories followed by Foreign Currencies, International stocks, and Commodities. Middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization weighted indexes. Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks. The relative strength sector weightings favor Consumer Discretionary, Real Estate, Information Technology, and Health Care. US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.





Paul L. Merritt, MBA, AIF®, CRPC®
Principal
NTrust Wealth Management



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



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.

Emerging market investments involve higher risks than investments from developed countries and 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. 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 CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.

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.

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 generally are 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.

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.

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 and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index. The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise 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 Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US. The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues. It has a heavy bias towards technology and growth stocks. The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region.

Tuesday, September 4, 2012

Federal Reserve Chairman Ben Bernanke delivered his much-anticipated speech at the Fed’s Jackson Hole conference Friday and markets reacted as would be expected.  His remarks made it clear that the Fed has its finger on the quantitative easing (QE) trigger, but that it was not ready to pull it just yet.  After a lackluster start to the week, Mr. Bernanke’s comments were enough to rally stocks, move bonds yields lower, weaken the US dollar, and push gold prices to a five-month high.  Investor attention will now turn to the European Central Bank (ECB) meeting next week where the ECB President, Mario Draghi, will address the very serious challenges facing the European Union (EU).

Friday’s rally was insufficient to push the Dow Jones Industrial Average (DJIA) positive for the week as this key index lost 67 points (-0.5%) and has now been down two consecutive weeks.  The S&P 500 fell by -0.3%, and the NASDAQ fell -0.1%.  The small and mid-capitalization heavy Russell 2000 posted a 0.4% gain.  The DJIA (0.6%), the S&P 500 (2.0%), the Russell 2000 (3.2%), and the NASDAQ (4.3%) were all positive in the month of August.  For the year the DJIA is now up 7.2%, the S&P 500 is positive by 11.8%, the Russell 2000 is up by 9.6%, and the NASDAQ leads all major indexes with a 17.7% gain.

Performance across the major economic sectors was generally muted with only four sectors posting positive returns.  Real Estate, Consumer Discretionary, Health Care, and Financials were the best performing sectors while Energy, Industrials, and Utilities were the weakest.  For the month of August, Information Technology was the best performing sector posting just over a 5% gain followed by Consumer Discretionary, and Materials.  Utilities, Consumer Staples, Telecom, and Real Estate were the negative sectors last month.  For the year, Information Technology, Consumer Discretionary, Financials, Health Care, Real Estate, and Telecom are all outperforming the S&P 500 while Utilities and Energy remain the worst performing sectors and the only two not exceeding the DJIA.

International stocks were notably lower last week with the MSCI (EAFE) losing -1.6% breaking six weeks of consecutive gains.  The heaviest losses came from Emerging Markets (-2.8%) and Asia/Pacific (-2.0%) regions.  For the month, the MSCI (EAFE) gained 2.4% and is now up 4.2% for the year.  The Emerging Markets was the weakest region in August losing -0.5% and is now up just 2.0% for the year.  Europe remains mired in crippling unemployment with a record 18 million (11.3%) of Europeans out of work.  Other economic indicators point to continuing slowdowns in the EU putting greater pressure political leaders and European Central Bank (ECB) President Mario Draghi.  Additionally, the growing concern about China slowing down along with the rest of the worlds’ major economies was punctuated last Saturday when the Chinese National Bureau of Statistics announced that the Purchasing Managers Index fell unexpectedly to 49.2 for August.  Any reading below 50 indicates contraction rather than expansion.

The Barclays US Aggregate Bond index stretched gains into a second week after gaining 0.5% for the week.  US Treasury yields fell again with the 10-year closing Friday at 1.543%.  In the past two weeks, the 10-week yield has fallen over a quarter percent from 1.814%.  The 30-year yield has followed a similar trajectory closing last week at 2.667% after closing at 2.932% just two weeks ago.  These drops in yields stem in part from two beliefs by traders.  First, Chairman Bernanke made it clear last Friday that he was still ready to intervene anytime to further stimulate the economy.  How specifically he would do this remains uncertain, but many economists believe buying more bonds is expected to be included in whatever steps he takes.  The Fed’s demand would push the price of bonds up and thus yields down.  Secondly, economic data here in the US has been flat and not improving thereby increasing the demand for bonds.  Low yields are the bond market’s forecast of slow economic times ahead. The cliché of a perfect storm is a bit overstated, but with the problems in Europe coupled with what is happening here in the US, bond yields have remained at historically low yields.  The same cannot be said for Spain.  Spain’s 10-year yield climbed up to 6.857% and is coming very close to the 7% level that most economists believe makes funding further Spanish borrowing unaffordable.  Not surprisingly, long-duration bonds—both Treasuries and Corporates—were the best performing of the bond sectors while low-duration bonds were the weakest.

The Euro gained just under one cent this past week to close Friday at $1.258.  This is now the third consecutive week of a strengthening Euro to the US dollar.  The US Dollar index, a measure of the US dollar strength against six major currencies, fell another 0.5% marking the fifth down week out of the past eight.  Expectations that the Federal Reserve will resume quantitative easing and thus holding down interest rates, is the likely cause for the weakening US dollar I believe.  The ECB, with all of its difficulties, still pays more on debt than the US providing incentive for buyers to remain invested in ECB debt.

Commodities posted another positive week as the broad Dow Jones UBS Commodity index rose 0.5%.  WTI Oil closed the week with a 0.5% increase closing Friday at $96.47 per barrel.  Gold rebounded strongly on Friday following Fed Chairman’s remarks at Jackson Hole and finished the week up 0.9% closing at $1687.60 per ounce.  WTI Oil jumped 9.6% in August while Gold added 4.5% and contributed substantially to the Dow Jones UBS Commodity index’s 1.3% gain.   Cocoa, Silver, and Cotton were to top gainers last week while Orange Juice, Cattle, and Platinum were the weakest.  The recent rise in oil prices has moved to the pump with the national average for a gallon of regular gas at $3.83 up 8.5% in August. 

MONETARY POLICY + FISCAL POLICY = ECONOMIC POLICY

If asked what subjects were interesting and which they might like to study, I doubt economics would be high on most people’s lists.  I remember a conversation I had some years ago while studying for my MBA at the University of Cincinnati with a friend who was earning her PhD in Economics.  I told her I thought the Holy Grail of economics was to find a quantitative model that would predict human behavior and since that was an impossible task, economics was more junk science than science.  Looking back, I realize how naïve that statement was.  I still believe that economists will never find the perfect quantitative model, but I do recognize that economics is a critical field of study and that our very well-being is strongly influenced by the outcome of economic policy decisions made both here and abroad.  Economists in the form of central bankers are exerting more power over economic policy than they have in several generations.

Economic policy consists of monetary policy and fiscal policy.  Monetary policy primarily uses the supply of money in an economy to maintain economic stability.  Controlling inflation is seen a top priority for most policy makers and they do so traditionally by setting interest rates by both regulation and the purchase and sale of bonds on the open market.  Central bankers are responsible for monetary policy in most of the free world and typically fall outside the control of political leaders.  This independence allows central bankers to make unpopular decisions such as shrinking the money supply and causing interest rates to rise and economies to slow.  Obviously, politicians would not likely support a contraction of money supply especially in an election year even if it were the right thing to do at that time.

Fiscal policy consists of policies regarding government spending and taxation.  Political leaders are responsible for setting policy matters with regards to how much a government will spend and for what, and also how much it will levy in taxes.  Politicians in democratic countries are accountable to their populations and are thus strongly influenced by the will of the people.

Coupled together, monetary policy and fiscal policy work together to foster economic growth, strength and well-being for a country. When fiscal or monetary policies get out of sync imbalances and trouble can occur.  This leads my analysis of today’s mess.

The EU and the US have been operating for decades with fiscal policies that have resulted in ever increasing sovereign debt levels.  Make no mistake, spending and borrowing is a fiscal policy decision, not a monetary one.  As debt levels increase, as government spending increases, more and more of the productivity of the private sector is diverted to government and less productive uses.  Over time this becomes a drag on an economy, production slows, unemployment rises, tax revenue to governments contract, and we suddenly wake up to the prospect of a pretty bleak future…unless fiscal policies are changed.  This is precisely the challenge facing us today.  We must make very, very tough fiscal policy decisions in democratic countries where the voters must in a sense vote against their own self-interest.

I believe most politicians do not like making tough decisions, especially when those decisions are likely to upset the very people who elected them to office.  Politicians look for an easier way.  The easy way in this case is to turn to the central bankers, Mr. Bernanke in the US and Mr. Draghi in the EU, and get them to do the heavy lifting.  For the most part, the central bankers have complied and we have seen some of the most accommodative and easy monetary policies in all of our lifetimes.  But that has not been enough to stem the crisis, especially in Europe.  Mr. Draghi did not go to Jackson Hole this past weekend because he is facing enormous pressures in Europe.  The German publication, Der Spiegel, published an outstanding story on August 27th that summarized the problem by saying, “They (politicians) are feeling desperate because, after 17 monetary summits, they still haven’t been able to stop the crisis.  And now they are pleased to see Draghi doing the work for them.” (Italics added for emphasis.)  I believe that we have a similar situation here in the US, not quite as severe, but serious all the same.

So here we are.  Our political leaders, failing to do their jobs, continue to push central bankers to use monetary policy to compensate for terrible fiscal policies.  There are voices who challenge this application of monetary policy.  One of the most important is Jens Weidmann, the president of the Bundesbank, Germany’s equivalent to Ben Bernanke.  Mr. Weidmann has opposed most calls for the ECB to begin direct bond purchases of EU sovereign debt saying that such purchases violate the 1992 Maastricht Treaty (created the EU and the Euro ) and relieves pressure on European leaders from making tough fiscal policy adjustments.  However, Mr. Weidmann has come under increasing pressure from many politicians to relent and support Draghi’s plan for an American-styled QE by the ECB.  The Der Spiegel story concluded that it was just a matter of time before Mr. Weidmann is politically overwhelmed and forced to support direct bailouts or resign.  Mr. Bernanke is also coming under political pressure from both sides here.  The Democrats want Mr. Bernanke to do everything he can possibly do to continue providing essentially free money to keep the current administration in the White House while Republicans want Mr. Bernanke to cut off bailouts and force political leaders to make tough decisions about reducing spending and borrowing. 

The debate continues.  As you know, I try hard not to make predictions because no one really can say how events will unfold.  If you were to force me to take a position I would have to say that I believe both the ECB and the Federal Reserve will continue to use monetary policy to make up for the failings of fiscal policy.  I say this because both Draghi and Bernanke have publically stated they support such actions, and I believe the only thing that has held them back for now are the few but vocal voices of opposition who seek to shift responsibility back to elected leaders.  Mr. Bernanke and Mr. Draghi can hold off the day of reckoning for just so long, however, and if sound fiscal policy is not in place soon, two percent growth is going to feel like the good ole days.

LOOKING AHEAD

Summer is officially over and I hope everyone enjoyed their Labor Day weekend holiday. Trades will get back to work and I suspect September is going to be an interesting month.

With Draghi’s absence at Jackson Hole, even more attention will be directed to his remarks following a meeting of the ECB on Wednesday.  Much has been made of his comment this past July throwing his full support behind preserving the Euro.  Traders are expecting Mr. Draghi to begin another large round of bond purchases (quantitative easing/QE) to help stabilize borrowing costs in such countries as Spain and Italy.  The news that Germany’s exports fell sharply in August (reported Monday morning, September 3rd) will put even more pressure on Draghi to act, and European markets holding firm on Monday reinforce this conclusion.  This will be an important speech and September promises to be an important month for the EU.

This holiday-shortened week has three major economic reports due out.  Tuesday morning is the Institute for Supply Management (ISM) Manufacturing Index August report.  The consensus calls for a reading of 50 which means manufacturing is neither growing or contracting.  Whether the number is a little above 50 or below, the manufacturing sector is not doing much.  Thursday has the weekly Initial Jobless Claims report.  Consensus is for jobless claims to come in at 370,000 the same expectation of the previous week.  The actual number last week was 374,000.  Again, this number is at such a level that a move a few thousand above or below doesn’t matter.  Unemployment seems frozen between 8% and 8.5%.  Finally, Friday has the official August Employment Situation report.  Consensus is calling for new non-farm payroll jobs to grow by 125,000 compared to July’s increase of 163,000, and the unemployment rate to remain at 8.3%.  All of these numbers have one thing in common…we are mired in a plow horse economy.

The New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 60.03 up from 59.79 the previous week.  This is the eleventh consecutive weekly increase for this important technical indicator.  I have noticed also that this is the third weekly drop in the rate of improvement meaning that the pace of improvement is slowing which typically happens before we get a drop in the NYSE Bullish Percent.  For now, however, positive momentum remains in US stocks.  The overbought reading for the S&P 500 continues to fall and closed Friday at 35%.  Looking back over ten weeks, the S&P 500 is getting less expensive and is clearly not in the extreme overbought range which I believe begins at 100%.  I have reported that fixed-income, bonds, has been the most overbought and therefore expensive asset class.  Even with the recent strength of US Treasuries, bonds as an overall asset class is now 77% overbought, high, but not extreme and well below the 120%+ readings of just a few weeks ago.  Only the Corporate High Yield bond sector is overbought by more than 100% at 125%.  Emerging market stocks have shown the greatest weakness and are now overbought just 14%, the lowest of any stock sector.

The Dorsey Wright & Associates analysis of the markets indicate that US stocks and Bonds are the two favored major asset categories followed by Foreign Currencies, International stocks, and Commodities.  Middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization weighted indexes.  Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks.  The relative strength sector weightings favor Consumer Discretionary, Real Estate, Information Technology, and Health Care.  US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category.

The fiscal cliff is looming, but for now all eyes will be on Europe.






Paul L. Merritt, MBA, AIF®, CRPC®
Principal
NTrust Wealth Management

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

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.
Emerging market investments involve higher risks than investments from developed countries and 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.  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 CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
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.

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 generally are 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.

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. 

 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 and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index.  The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise 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 Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US.   The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues.  It has a heavy bias towards technology and growth stocks.  The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index.  With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region.