Monday, December 9, 2013

MARKET UPDATE AND COMMENTARY
December 8, 2013



The Dow Jones Industrial Average (DJIA) and the S&P 500 posted their first weekly loss last week after eight straight positive weeks. For the week, the DJIA fell 0.4% and the S&P 500 dropped 0.04%. The Russell 2000 continued its recent trend of underperformance falling 1.0% while the NASDAQ posted a 0.06% gain.

With 49 weeks of trading completed for the year, the DJIA is up 22.2%, the S&P 500 is up 26.6%, the Russell 2000 has gained 33.2%, and the NASDAQ leads the major indexes with a gain of 34.5%.

Prior to last Friday, US markets traded down for the previous five trading sessions even as economic data were indicating growing strength in the economy. Friday’s nearly 200-point gain in the DJIA followed the release of the November Employment Situation report showing unexpectedly high jobs growth bringing the overall unemployment rate down to 7.0%. The consistent message of recent economic data is that the economy is growing steadily in the face of strong fiscal (governmental) headwinds and, I believe, has increased the likelihood that the Federal Reserve will begin reducing (tapering) its current $85 billion per month bond purchase program.

International markets have tracked the US markets relatively closely this year, but without the same level of gains. The European-heavy STOXX 600 index fell 2.7% last week but is up 13.2% for the year. The Wall Street Journal’s Developed Market index is up 20.7% for the year, while the Emerging Market index is down 5.6% and the Asia/Pacific index is up 8.6%.

The Commodities asset class has been a big disappointment in 2013. The Dow Jones UBS Commodity index is down 9.8% for the year; however, this broad-based commodity index has added 1.8% over the past three weeks led by a 13.0% increase in natural gas and 4.1% increase in WTI Oil. Gold remains very weak giving back 26.6% in 2013. The increase in energy prices and other consumable commodities, I believe, is a positive short-term indicator that investors believe a strengthening economy will increase demand for basic commodities and push up prices.

Interest rates continue to trend higher. The US Treasury 10-year yield closed Friday at 2.86% up from the previous Friday’s close of 2.74%. The Barclays US Aggregate Bond index lost 0.5% for the week and is now down 2.1% for the year. Remember that rising interest rates push the value of most bonds down and that this trend of rising interest rates leaves many bondholders at risk for further losses.

BUBBLE, BUBBLE, TOIL AND TROUBLE

As markets continue to remain at or near all-time highs, more and more articles are appearing warning investors of the over-extended position of US stock markets. The common thesis of these articles is that with the DJIA above 16,000 we must be in a bubble and gains in the stock market are artificial and induced by the Federal Reserve’s accommodative monetary policies. None other than Nobel Laureate and Yale Professor, Robert Shiller, told the German weekly publication, Der Spiegel, last week that “many countries stock exchanges are at a high level,” and that he is “most worried about the boom in the U.S. stock market.” The recent market pullback in the face of improving economic news certainly gave some credence to this point, but how do you explain Friday’s strong move?


I believe the answer to this critical question is corporate profits. As I have noted in previous Updates, corporate profits remain at near all-time highs in terms of a percentage of profits with respect to the Gross Domestic Product (GDP). The 3rd Quarter revision of the GDP reported corporate profits at about 10% of GDP and well above the historical average of between 6% and 7%. In the final analysis, I believe the value of companies is all about profitability and companies are making money today.

Looking at the overall valuation of markets, Scott Grannis of the Calafia Beach Pundit, blogged last week that the S&P 500 is, based upon historical averages, actually undervalued. He points out that there are many different ways to determine the overall price/earnings (PE) ratio (how much companies are valued compared to how much they are earning), and some do show the markets overvalued. However, Grannis believes that using NIPA profits (the Bureau of Labor Statistic’s calculation of total economic after-tax corporate profits) is the most accurate measure of profits, and that the NIPA PE ratio of the S&P 500 is about 12 compared to the historical average of 16. He goes on to explain that investors are pricing in very weak future earnings because many investors believe corporate profits will fall significantly going forward, yet the economic data that continues to be reported simply does not support this perception.

It is unrealistic to expect markets to move upward in a straight line, however, those investors who have listened to the bearish pundits and sat on the sidelines have missed the strong stock rally over the past few years.

The rise in interest rates since the middle of the year supports the argument that the economy is growing. Rising interest rates typically occur in a growing economy because investors tend to sell bonds and buy stocks. This trend is confirmed by cash flow statistics reported by the Investment Company Institute which show that through the week ending November 26th, taxable and municipal bond investments have had an outflow of $59.5 billion this year while US and International stock investments have had inflows of $157.9 billion. This buying and selling has, in my opinion, clearly put pricing pressure on bonds and pushed up interest rates.

Friday’s market action was significant because it was the first time that the market rallied recently on good news. The concern regarding tapering is real and I am not dismissing the potential psychological impact on investors when the Federal Reserve begins to (and they will) taper. If you belong to the school of investors who believe that the market is artificially high due to cheap money, then you would expect a pullback as tapering begins. If you belong to the school that believes markets have rallied because the economy is still growing and corporate profits will continue to remain strong (as I believe), then we should expect to see the upward trend in markets to continue. I do expect there will be increased volatility as the two schools of thought battle it out in the months to come, however, as long as the economic data continue to support economic expansion and corporate profits remain strong, the rising trend of markets should continue.

LOOKING AHEAD

My DorseyWright & Associates (DWA) technical indicators continue to favor small and mid-capitalization stocks over large cap. Growth is favored over value, and equal-weighted indexes are favored over capitalization-weighted indexes. US stocks are favored over all other major asset classes with International stocks remaining firmly in second position. Fixed income ranks third followed by Currencies, Money Market, and Commodities.

Money Market as an investment sector currently ranks 116 out of 132 of the sectors tracked by DWA meaning that the vast majority of sectors are outperforming cash. I cannot stress enough how important this ranking is in providing a key indicator of what is happening within the broad market. If Money Market begins to climb higher, it would be an important signal that more and more investments are beginning to weaken and caution will be warranted. This is one of my key risk indicators and I will certainly keep you informed of any changes to this important statistic.

Two major economic reports are due out this week. November Retail Sales will be released Thursday morning. This monthly report will take on added significance because we are in the all important holiday shopping season. The November Producer Price Index will be released Friday morning. This too will be an important data point because it will be a signal of the potential for increased inflation in the months ahead. Both of these data points will certainly be looked at closely by the Federal Reserve.

The Federal Reserve has one more meeting this year on December 15th and 16th. Guidance from the Fed will be released on Wednesday afternoon, December 16th. Economists and investors will be listening closely for clues of when tapering is likely to begin.

My next Market Update and Commentary will be published the last weekend in December.

I want to thank each of you for your support and feedback this year. I hope each of you have the opportunity to share this holiday season with family and friends.




Paul L. Merritt, MBA, C(k)P®, 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. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.

Monday, November 18, 2013


MARKET UPDATE AND COMMENTARY
November 17, 2013


Just when you think Washington cannot get any more dysfunctional, our political leadership manages to find new ways to outdo themselves. Thankfully, the stock market’s collective view has been to watch warily but not lose focus on earnings and economic data that shows a slow, plodding economy continuing to grow. The Wall Street Journal reports that according to FactSet, of the 460 companies reporting earnings for the third quarter so far, 73% have exceeded their consensus earnings forecasts. Additionally, at Janet Yellen’s confirmation hearings this past week to succeed Ben Bernanke as Fed Chairman, she made clear that she would continue the Federal Reserve’s accommodative monetary policy for the time being. This relieved one of the immediate fears of investors that the Fed would begin drawing down the bond purchase program before the economy was strong enough to stand on its own.

Two full trading weeks into November, the Dow Jones Industrial Average (DJIA) has gained 2.7% for the month. The S&P 500 is up 2.4%, the Russell 2000 is up 1.5%, and the NASDAQ is up 1.7% over the same period. For the year, the DJIA is up 21.8%, the S&P 500 is up 26.1%, the Russell 2000 has gained 31.4%, and the NASDAQ leads the other indexes with a gain of 32.0%.

The dovish (favoring accommodative monetary policies) position taken by Ms. Yellen during her confirmation hearing helped bonds find some stability. Looking at changes to the 10-year US Treasury bond yield so far in 2013 (above), you can see where interest rates shot up in early May after Mr. Bernanke indicated he would begin tapering bond purchases in 2013. At the September Fed meeting, Bernanke suddenly changed his tune and signaled that tapering would not begin for some time causing interest rates to fall and the 10-year yield has remained within a range of 2.5% and 2.8% ever since. The Barclays US Aggregate Bond index has improved by 2% since mid-September although it still remains down 1.5% for the year.

International stock markets continue to perform well. The broad international index, the MSCI EAFE NR, is up 20.0% year-to-date (YTD). The European-heavy STOXX 600 index is up 15.5%, the Asia/Pacific region is up 10.2%, while the Emerging Markets region continues to trail with a loss of 5.3% YTD.

YOU AND DURATION

I am going out on a limb and make a prediction.

Now everyone who has read my Market Update and Commentary since I began writing them some four years ago knows that I do not like making predictions. The reason is that predictions are nearly impossible to get right repeatedly. So while it may be fun to speculate about future events and outcomes, they rarely provide the basis for consistently sound investment decisions. However, today I am going to do it anyway and here it is: 98% of people find talk about bonds and bond theories boring! Yep, that’s it. With this prediction in mind, I am going to have a discussion with you about bond theory. Why? Because it is very important and many, many investors have a lot of money tied up in bonds. So consider yourselves forewarned and grab a cup of coffee or Red Bull before you read the next couple of paragraphs.

One of the most important concepts for investors to understand is that when interest rates go up, bond prices fall. This happens because as rates increase, a bond owner with a fixed-rate bond must reduce the value of their bond in order to attract buyers. If the bond owner has a bond paying 5% and yields for similar bonds is now 6%, why would a bond buyer purchase a 5% bond when they could get a 6% bond? The answer is they would not, so the bond owner drops the price of their bond until the effective yield to the buyer is 6%.

Therefore, bond owners realize that if interest rates go up, they are likely to lose principal. If they own one bond, the calculation to determine how much the bond’s value will fall as rates rise is relatively easy to determine. But what happens if the bond owner has many different bonds and they want to know the impact of rising interest rates on the overall value of their portfolio? This is where the concept of duration comes in.

Technically, duration is the measurement in years that it will take for the price of a bond to be repaid by internal cash flows (interest and ultimately principal). The longer the duration, the greater the risk of price volatility. Like many tools in finance, there are multiple types of duration calculations and they are all complex to determine. For most of us, the most important duration we need to be familiar with is modified duration which is designed to tell the investor how much principal they could expect to lose if interest rates rise by 1%. Modified duration can be found from many sources but is most readily available from Morningstar. If, for example, your bond investment has a duration of 4.5 years you could expect to lose about 4.5% of principal for every 1% rise in interest rates. Because bonds pay interest, those interest payments help offset the loss of principal in the bond portfolio. This last point is a key concept I want to you to come away with.

Although we have been in a 30-year bull market for bonds where interest rates have been falling since the early 1980’s, many bond managers (include me in this group) believe that interest rates will go up from the historic lows reached in the past year (1.4% in July 2012 for the 10-year Treasury). Interest rates, like most other economic data, do not rise or fall in one straight line; rather they go up and down in the overall directional move. The year 1994 is considered one of the most painful in terms of bond prices in the modern era. The 10-year US Treasury yield began 1994 at 5.75% and closed the year at 7.78%--a rise of 2.03%. A portfolio with a duration of 4.5 years would have lost about 9%. However, investors received interest payments over the year. Assuming for purpose of discussion, an investor received 7% in interest for the year; their net loss would have been approximately 2%. Today, with interest rates starting from such a low level, a 2% jump in interest rates on a portfolio with a duration of 4.5 years would result in more significant losses because investors will not have the higher interest rate income to offset the same loss in principal.

If you are still with me, here is what I want you to take away:

1) You must be very aware of the duration of any bond portfolios you own.
2) This time it is different because interest rates are coming off historically low bottoms.
3) I believe there is more risk in bond portfolios than most people realize today.
4) There are more options to invest in bonds than ever before and a smart bond sector strategy can help mitigate the risks of a rising interest rate environment.

LOOKING AHEAD

Markets continue to reach higher and higher levels. As this happens more articles are appearing in the media about bubbles and corrections. There have only been two down months so far this year (June and August for the DJIA and S&P 500) and these pullbacks were relatively modest. The analysis provided by DorseyWright & Associates continues to favor stocks over bonds, currencies, money market, and commodities. Therefore, I am continuing to recommend that investors stay focused on stocks (US and International) for now.

One possible trend I am watching closely has been the recent underperformance of small capitalization stocks compared to the large caps. This trend has been in place only since October and even then in just sporadic patches. Small capitalization stocks represent the riskier aspect of the market and when investors start to lose faith in stocks, there can be a rotation from small cap over to large cap stocks before the markets begin to fade. There is not enough data to support this as a real trend yet, however, I am watching to see how this develops.

I would like to close my Update and Commentary by reminding everyone that this Tuesday, November 19th, marks the 150 anniversary of Abraham Lincoln’s Gettysburg Address. I personally believe that the Gettysburg Address is the finest speech ever given by an American president at what was one of the most critical junctures of our great past. If you have not read Mr. Lincoln’s “humble” remarks recently, I strongly encourage you to do so. His words are as vibrant and strong today as they were 150 years ago, and they capture what is so great about the American character—strength, sacrifice, righteousness, and a true belief in the greatness of our Country.

My next Update and Commentary will be published in two weeks.




Paul L. Merritt, MBA, C(k)P®, 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. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.

Tuesday, November 5, 2013

MARKET UPDATE AND COMMENTARY
November 3, 2013


Despite media expectations to the contrary, the sky did not fall, the sun came up, and life as we know it did not end in October.

For the month of October the Dow Jones Industrial Average (DJIA) finished up 2.8%, the S&P 500 added 4.5%, the NASDAQ gained 3.9%, and the Russell 2000 trailed with a 2.4% gain. This does not mean there were not some tense moments along the way. The cacophony of doom and gloom reporting surrounding the budget and deficit talks in Washington was deafening; however, when the dust cleared, we survived. Our political leaders have yet again kicked the can down the road until after the first of the year, when the political fighting is expected to emerge again.

President Obama has officially nominated Janet Yellen to assume the Chairmanship of the Federal Reserve, but expect some political fighting during the nomination process. Ms. Yellen is expected to continue the more accommodative monetary policies (translation: low interest rates and continuation of bond buying) of her predecessor, Mr. Bernanke. In the meantime, some positive economic data in the manufacturing sector late last week brought out a chorus of pundits suggesting that the Fed will have to start reducing (tapering) bond purchases sooner than anticipated (late 2013 vs. spring 2014). While I have argued many times that the Fed is NOT responsible for the strength of the stock market this year, I believe there remains a strong psychological crutch associated with the Fed’s policies and investors’ perception of market strength. It is unclear what impact pulling this crutch will have on the markets once some form of tapering actually begins.

I fully expect Ms. Yellen’s nomination process, taper talk, and the next round of budget/deficit negotiations on Capitol Hill to increase investor worries and with it, greater volatility over the next three or four months.

ASSESSING WHERE WE ARE TODAY

I am struck by how quickly the end of the year is approaching. My wife, Virginia, recently posted on Facebook that one of our local easy listening radio stations is already playing Christmas music 24/7. Wow. What happened to Thanksgiving?

With just eight trading weeks remaining in the year, I want to do a quick recap of where we are today.

The major US stock market indexes are all up nicely for 2013. The DJIA is up 19.2%, the S&P 500 is up 23.5%, the small and mid-capitalization heavy Russell 2000 is up 29.0%, and the tech-heavy NASDAQ has gained 29.9%.

Returns are not shared equally between the eleven major economic sectors I follow. The Consumer Discretionary sector leads all with a gain of nearly 36% for the year. Health Care and Industrials follows with gains of 35.6% and 32.3% respectively. Real Estate, Utilities, and Materials have been the weakest sectors with year-to-date returns of 5.6%, 13.3%, and 17.7% respectively.

Bonds have been very disappointing for most investors. The Barclays US Aggregate Bond index, which is a representation of a cross section of US bond sectors, is down 1.2% for the year. Much of this poor performance is attributable to the rise in interest rates (when interest rates rise, bond prices/values fall). The benchmark US 10-year Treasury yield began the year at 1.76% and closed October 31st at 2.55%--an increase of 79 basis points (one basis point is equal to 0.01%). Interest rates have tended to trend along with investor sentiment of when the Federal Reserve is likely to start tapering. Low risk of tapering, lower interest rates; greater expectations, higher interest rates. Not all bond sectors have been negative for the year, however. The High Yield and Bank Loan bond sectors have been notable exceptions with total returns of 6.0% and 4.8% respectively. Long Government, Inflation Protection, and the Emerging Market bond sectors have been the weakest losing about 9.9%, 6.4%, and 5.6% respectively (source: Morningstar).

International markets have quietly shown some strength this year, particularly in the European region where the STOXX 600 has gained 15.3%. While the Emerging Markets region has rebounded a bit in the last couple of months, it remains down 2.6% for the year. Small and mid-capitalization international stocks have led all sectors within the international category.

Commodities continue to struggle and remains the weakest of the six major asset categories I follow. The Dow Jones UBS Commodity index, a broad measure of commodities, has lost 10.9% year-to-date. Within the commodity space, gold has been a major loser posting a decline of 22.4% with WTI Oil up just 3.2%. However, WTI Oil has been particularly hard it recently posting a 10.4% drop since August 30th.


I have recently noticed that there has been an increasing sense of worry over the strength of equity markets; however, this negative sentiment has been prevalent most of the year as equity markets posted solid gains. We have just completed what historically has been the weakest six months of the market, and the S&P 500 posted a 9.95% gain. When compared to other periods (back to 1954) where the S&P 500 managed to gain 10% or more over this same time frame, the S&P 500 on average added another 14.9% over the subsequent twelve months and 24.1% over the next two years (source: DorseyWright & Associates). While past performance is not indicative of future performance, it does offer a compelling argument that momentum can continue for a while.

As I have discussed before, I watch the relative strength of the Money Market sector compared to the other 131 sectors I track, and Money Market currently ranks 116 out of 132 (bottom 12%). In simple terms, this means that 115 categories are beating Money Market on a relative strength basis. Think of cash today as the market’s equivalent of pro football’s New York Giants. If I see this relationship begin to change, I will certainly let you know.

LOOKING AHEAD

The dysfunction in Washington remains. This is not good for our country nor is it good for business. However, sound investing requires a tin ear when it comes to listening to the pundits and media. Much relevant data indicate that the economy is growing not contracting. In this environment, that is what is necessary for the markets to continue to gain or avoid a major (>10% correction) in my view. Growth could be much better, but broad, slow growth does remain. So while I am not discounting the potential impact of the political battles our nation is currently enduring, I am also not losing sight on the momentum the equity markets are currently carrying.

I will repeat what I have been saying all year. US stocks remain the favored major asset category as tracked by Dorsey Wright & Associates. US stocks continue to hold the number one position while the International stocks asset category is a solid number two. Fixed-income is in third place, Currencies is fourth, Money Market is fifth, and Commodities remain in last place where this category as been since June 21, 2012. Small and middle-capitalization stocks are preferred over large-capitalization stocks. Equal-weighted indexes are preferred over capitalization-weighted indexes. Within the Fixed-Income category, high yield and bank loan bond sectors are favored, while energy is now favored in the weak Commodities category.

I currently favor the Consumer Discretionary, Health Care, and Industrials sectors. Within the sub-sectors, I like the Technology (Internet) and Biotech sectors.

Looking at key economic reports for the coming week, the first estimate of the 3rd Quarter Gross Domestic Product will be released on Thursday morning. There is great uncertainty around the consensus of this number and the Wall Street Journal’s estimate ranges from 1.5% to 2.7%. As a matter of comparison, the first quarter and second quarter official growth rates were 1.1% and 2.5% respectively. The October Employment Situation report will be released on Friday with a slight decline in jobs over the previous month expected. There may be some discussion regarding the impact on the employment numbers due to the temporary closure of the federal government in October. All of these reports will be parsed in order to draw some indication of whether or not a strengthening economy will cause the Federal Reserve to begin tapering its bond purchases earlier than the late spring consensus.

On a personal note, you may have noticed that I missed publishing the Market Update and Commentary last week. I was in Chicago sitting for my C(k)P Certified Professional 401(k)® designation exam which I am happy to announce that I passed. This rigorous course of study is sponsored by The Retirement Advisor University in conjunction with the UCLA Anderson School of Management Executive Education.

My next Update and Commentary will be published in two weeks.




Paul L. Merritt, MBA, C(k)P®, 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. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.

Tuesday, October 15, 2013

MARKET UPDATE AND COMMENTARY OCTOBER 13, 2013

MARKET UPDATE AND COMMENTARY
October 13, 2013


Washington is a mess while the rest of America pushes on.

I believe this pretty much sums up where we are as our nation enters the third full week of a federal government shutdown.

The stakes are very real, but markets here and abroad have not overreacted at this point. Volatility has increased, but most key US and international indexes are higher two trading weeks into the month.
Both the Dow Jones Industrial Average (DJIA) and S&P 500 are up 0.7% so far into October. The technology-heavy NASDAQ Composite has gained 0.5% for the month, while the small- to mid-capitalization dominated Russell 2000 was down 0.3%. For the year, the DJIA is up 16.3%, the S&P 500 is up 19.4%, the NASDAQ has gained 25.6%, and the Russell 2000 still leads all major US indices with a year-to-date gain of 27.7%.

Traditional safe-haven assets, gold and US Treasuries, have both fallen in value since the shutdown. Gold has fallen $56.20 (-4.2%) per ounce in the past two weeks closing Friday $1270.80 per ounce. After a brief rally earlier in the summer, gold has now fallen $403.70 (-24.1%) for the year. The yield on the US 10-year Treasury has increased nearly 8 basis points in October to close Friday at 2.688%. Recall that bond values drop when interest rates increase. The Barclays US Aggregate Bond index is down a fraction for October and off just over 2% for the year. In general, bonds have not contributed any real gains to overall portfolio returns.

Every major economic sector is positive since the shutdown began. Real Estate, Financials, and Utilities are all up over 2% for the month. For the year, Health Care (+31%), Consumer Discretionary (+30%), and Industrials (+27%) are the top performing sectors, while Real Estate (+6%), Utilities (+14%), and Materials (+14%) are the weakest.

International stocks continue to perform well. The Dow Jones Global ex-US index, a very broad international index, is up 1.2% in October while the European-heavy STOXX 600 index is up 0.4%. Emerging markets added to their recent gains rising 3.9% for the month. For the year, the Dow Jones Global ex-US index is up 9.7%, the STOXX 600 is up 11.4%, and the Dow Jones Emerging Markets Total Stock Market index is down 3.6%.

While the rhetoric in Washington is reaching new lows of civility and investor fears are heightened, the markets have, for the most part, stayed on the sidelines.

MARKET TIMING

The greatest aspect of my job is my clients. When asked by friends about what I do for a living I always begin my answer by saying, “I work with really terrific people!” My clients come from all walks of life, they each have unique and fascinating life stories, they work hard, and are successful. Moreover, unlike other professions that tend to be more transactional relationships (i.e. real estate sales, mortgage brokers, or sadly—divorce attorneys); my relationship with clients is ongoing, regular, and very interactive. Over time, I get to know a lot about not only my clients but also their families, their goals, and their aspirations. They also ask me a lot of tough questions about the markets and their investments--especially during times like these. This is how we learn about each other, and for me, I get the true measure of each person’s risk tolerance. From this comes the necessary level of understanding that allows me to develop an appropriate investment strategy for each client and family.

One of the tough questions I have been asked over the past two or three weeks is whether we should sell given the growing crisis in Washington. My answer begins by saying that I cannot time the markets. In fact no one can—period! I then follow with a question of mine, “what signal would you use to time your re-entry into the markets?” From there I explain the difference between trend following (which I believe in) and market timing (which I do not). I conclude my answer by analyzing the current data the markets are providing. I always conclude each Market Update and Commentary with a summary of this information.

I would like to devote a few comments to what market timing is and how it differs from trend following.

Market timing is making buy and sell decisions based upon predictions about the future. Numerous technical analysts have developed models in an attempt to predict the future and then trade accordingly. While it may be possible to predict future actions occasionally, it is very difficult to do it consistently. Trend following is ongoing analysis that studies relative strength of investments and making buy and sell decisions based upon which investments have the strongest relative strength. There is no effort to predict the future in trend following, rather decisions are made by the belief that trends come and go—sometimes for extended periods, and, I believe, it is better to own investments that are trending in a positive manner. Trend following is also very adaptive when trends do change.

Looking at today’s circumstances with the dysfunction in Washington, I believe that after watching the markets over the past couple of weeks, it is possible to generalize that markets tend to go down when a deal looks unlikely, and markets rally when a deal (or the possibility of a deal) is in the works. Do I know whether Congress can work out an immediate deal, or whether the President will allow the Treasury to default on debt to make a point, or if the Federal Reserve will begin tapering tomorrow or in 2014, no I don’t. Neither does anyone else. Even if I did, the speed of events and the swift news cycle, you can be right one minute and wrong the next. So I do not believe it is possible to time the market, and I will continue to rely on the trend data provided by Dorsey Wright & Associates to guide my investment recommendations.

LOOKING AHEAD

The brinksmanship in Washington is reaching a fever pitch. Both sides are firmly entrenched and there seems to be little public discussion by our political leaders over how to get an agreement about the budget or the debt ceiling. The government shutdown is proving to be a non-event because the vast majority of government is still running and all those furloughed workers will receive all back pay. The debt ceiling is another matter. The decision to default sits directly with the President. According to the Wall Street Journal, the US Treasury takes in roughly $200 billion per month and owes interest on the debt of about $25 billion each month so there is no legitimate reason not to pay interest. The Treasury could issue new debt to retire the old debt without raising the debt ceiling. So any default will rest squarely with the White House despite much of the reporting in the media.

No one believes that President Obama will default on the debt because that would do grievous harm to the United States and its standing in the world. This is why I believe that it is extremely doubtful that the President will allow the country to technically default on any debt. Should he choose otherwise, there will be, in my opinion, great stress in the markets.

The data I follow also suggests that the odds of default are minimal at this time. US stocks remain the favored major asset category as tracked by Dorsey Wright & Associates. US stocks continue to hold the number one position while the International stocks asset category is a solid number two. Fixed-income is in third place, Currencies is fourth, Money Market is fifth, and Commodities remain in last place where this category as been since June 21, 2012. Small and middle-capitalization stocks are preferred over large-capitalization stocks. Equal-weighted indexes are preferred over capitalization-weighted indexes. Within the Fixed-Income category, high yield and bank loan bond sectors are favored, while energy is now favored in the weak Commodities category.

I currently favor the Technology (Internet), Health Care, and Industrials sectors.

We are facing yet another week of Washington dysfunction. The statutory debt ceiling is expected to be reached this Thursday (October 17th). It is completely uncertain how this will play out, however, I continue to believe some last minute, short-range deal, will be reached. I also believe that volatility in the markets will continue if negotiations continue to drag out.

As I said in my last Update and Commentary, it will be an interesting couple of weeks ahead.

My next Update and Commentary will be published in two weeks.




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. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.

Monday, September 30, 2013

Market Update and Commentary September 29, 2013


MARKET UPDATE AND COMMENTARY
September 29, 2013


The apparent reversal of Fed policy just over a week ago unsettled investors causing a readjustment of expectations.

On Wednesday, September 18th, the Federal Reserve released its current economic outlook and announced that there would be no immediate tapering of its bond buying program. This was somewhat of a surprise because Chairman Bernanke had been signaling since his June commentary that the Federal Reserve was ready to begin tapering. Initially stocks rallied; however, both the Dow Jones Industrial Average (DJIA) and the S&P 500 have since been down six of the past seven days. I believe markets reacted to the change in guidance on tapering as well as other aspects of the Federal Reserve’s commentary including the downward revision for economic growth for both the remainder of 2013 and all of 2014. The Fed left the door open to tapering later in the year and consensus indicates that bond purchases will still terminate by the end of 2014. The announcement, in my view, did not help the Federal Reserve’s credibility and raised a number of questions about whether or not Chairman Bernanke deferred to Janet Yellen, the possible successor to Bernanke next year, in this seemingly abrupt change in policy guidance. New uncertainty was introduced by the Fed.

With one trading day left in September, the DJIA and S&P 500 indexes were up three of four weeks in September (last week being the only down week) and the indexes have gained 3.0% and 3.6% respectively so far this month. The Russell 2000 and NASDAQ were positive all four weeks and are up 6.3% and 5.3% for September. For the year, the DJIA is now up 16.4%, the S&P 500 is up 18.6%, the Russell 2000 has gained 26.5%, and the NASDAQ is up 25.2%.

Yields on US Treasuries have fallen since the September 18th announcement. The chart to the left of hourly moves in the US 10-year yield shows that this key yield was trading at about 2.863% just prior to the announcement and has since fallen nearly 24 basis points to close Friday at 2.626%. This helped the Barclays US Aggregate Bond index to post a 1.0% gain in September, and reduce the year-to-date loss of this broad bond index to just under 2%. Bonds have not given much help to overall portfolio returns in 2013, but the recent fall in interest rates has helped a little.

Commodities remain lackluster. The Dow Jones UBS Commodity index is down 1.9% in September and down 8.0% in 2013. After a good July and August, gold has fallen 6.3% in September and is now down 21.8% for the year. WTI Oil fell 5.8% last week but remains slightly positive (+0.5%) for the month. For the year, the cost of a barrel of WTI Oil has increased $16.51 (+18.0%) per barrel closing Friday at $102.87.

EMOTION VS. DATA

I attended a conference this past week in Richmond, Virginia. The conference was sponsored by First Trust Advisors, a money management firm based in Chicago, IL. One of the keynote speakers, Brian Wesbury, is their Chief Economist and, in my opinion, one of the really smart economic guys in this business. I will start with a quote Brian made recently when addressing the impact of Obamacare on the economy. He said, “do not let your political worries pollute your investment philosophy.” Put another way, Brian was suggesting that you cannot let your emotions about what is going on around you influence your investment decisions. This is an important concept in investing. More on this in a moment.


Let me share with you some of the highlights of the conference and Brian’s thoughts.


Investors are suffering from Post Traumatic Stress Disorder (PTSD) following the market collapse in 2008. This was a key point and one that I strongly support. The fear of further losses trapped the average investor in selling low and then remaining on the sidelines as markets recovered strongly.

The revolution in oil and gas exploration is a big deal. The growth of domestic oil and gas production in the US is growing exponentially thanks to activities in the North Dakota Bakken and Texas Eagle Ford Shale areas. These are two of the biggest areas but not the only ones producing oil in the US. The Bakken field alone produced more oil in 2012 than all of Egypt. The Texas Eagle Ford Shale area has more than 2 times the proven reserves of Saudi Arabia. This same theme extends to other areas in Texas, New York, Pennsylvania, and even California. Net oil imports as a share of US consumption has fallen from a high of over 60% in 2005-2006 to around 40% in 2013 and this trend is expected to continue (Source: US Energy Information Agency and First Trust Advisors). In fact, Brian suggested that the US will be the world’s leading exporter of oil in 5 years. This is happening despite of the current opposition of domestic oil exploration by the White House and other federal agencies. The abundance of cheaper energy at home will improve economic prospects to sectors beyond energy especially in manufacturing.

Technology is leading to major improvements in the economy. There is a revolution taking place in technological innovation. One example Brian provided is the incredible advancement in 3-D printing. In case you are not familiar with this new technology, companies are now able to scan an object and then print a three dimensional copy in a matter of hours or minutes. The materials used are polymers and even organic materials. Applications in manufacturing and medicine are growing every day. Other examples highlighted were cloud computing and smart phone technology.

Demographic trends are working in our favor. Of the major world countries, only the US and India will experience labor force growth by 2050. According the Census Bureau estimates, by 2050 India’s population will be 73.8% larger, the US will be 42.4% larger, Brazil will be 29.1% larger (but the rate of growth will be declining), while China’s labor force will decline by 9.8%, Western Europe will decline by 15.6%, Russia’s labor force will fall by 23.9%, and Japan will lose a staggering 43.5% of its population. These numbers have a major influence in supporting economic growth in each country.

Additionally, Brian addressed some of the key issues facing the economy today.

Stocks are higher because earnings have grown, not because of Fed stimulus. After-tax corporate profits are at all-time highs and this is what has propelled the stock market, not quantitative easing (QE).

QE has not held interest rates down. Brian reported that following each round of QE, interest rates were/are actually higher then when each round of QE began.

The more government spends, the higher unemployment rates are. Brian reviewed economic data going back to 1960 and suggested that if you overlay government spending as a percent of GDP (Gross Domestic Product) and compare that to the unemployment rate, there is a high correlation between these important statistics. His conclusion from the data is that the more the government spends within the total economy, unemployment increases, and the weaker the economy is.

This brings me back to the idea of emotion versus data. It is understandable to feel less than optimistic about what is happening today when you take in the daily headlines. Both traditional news and business news headlines are scary and imply the end of American prosperity as we know it. Both political parties have taken their rhetoric to new lows as they try to shape events to their advantage. While I do not dismiss the importance of political actions on the overall strength of the country, I do believe that investors who focus on the data and not the noise will have an advantage over those who let their heart rule their portfolios. And those who regularly read my Market Update and Commentary know, this is precisely what I have been talking about for the past several years. The technical research provided by Dorsey Wright & Associates has guided my guidance without regard to the headlines. I have been consistent in my views that US stocks should be favored, and international stocks—especially developed countries, are also strong. Bonds are next, and I have been avoiding most commodities lately. Please do not confuse this statement with the idea that it is always smoothing sailing, it is not. However, investors have been rewarded for investing in stocks over the past four years. Finally, I must say that risk management is more important than ever. Risk must be managed and be consistent with each individual’s situation.

It is critical to take emotion out of investment decisions and focus on the data.

LOOKING AHEAD

US stocks remain the favored major asset category as tracked by Dorsey Wright & Associates. US stocks continue to hold the number one position while the International stocks asset category is a solid number two. Fixed-income is in third place, Currencies is fourth, Money Market is fifth, and Commodities remain in last place where this category as been since June 21, 2012. Middle and small-capitalization stocks are preferred over large-capitalization stocks. Equal-weighted indexes are preferred over capitalization-weighted indexes. Within the Fixed-Income category, high yield and bank loan bond sectors are favored, while energy is now favored in the weak Commodities category.

Looking at sectors, I favor Biotechnology, Technology, and Health Care.

Barring an unexpected compromise, it looks more and more likely that Congress will not reach a funding agreement for the Federal government beyond Monday at midnight. As it stands on Sunday afternoon, the Senate is not expected to vote on the latest spending bill passed by the House until sometime Monday afternoon. There is little evidence to show that the Senate will pass the bill and if they did, the President has promised to veto the bill. The political drama is high and markets do not appreciate this kind of last minute brinksmanship. I am anticipating that markets will react negatively if Washington cannot get its act together quickly.

It could be a challenging time in the markets this week.

My next Update and Commentary will be published in two weeks.




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