Friday, February 26, 2010

Market Update February 21, 2010 The past week saw a rebound in the US equity markets, a modest gain internationally, and bonds marking time. In general, the markets are continuing to consolidate and not showing much direction so it is imperative to be patient as we look for new leadership and trends. The major news of the week came on Thursday afternoon when the Fed announced a quarter percent increase in the discount rate to 0.75%. The discount rate represents the cost banks pay to borrow directly from the Fed. This move proved to have a minimal impact on the markets, as the Fed wants, but it is the first significant action taken to begin returning the credit markets to a more normal posture. The press release accompanying the announcement stated that the increase does “not signal any change in the outlook for the economy or for monetary policy.” While the timing of this rate increase caught the markets by surprise, it is consistent with a longer-term strategy by Fed Chief Bernanke to begin pulling back from his accommodative monetary policy. Investors should see this as a sign that there will come a time when the Fed will begin to tighten monetary policy coupled with a corresponding increase in interest rates. While not imminent, it will eventually have a negative impact on bond valuations. With the Fed’s announcement, I continue to watch domestic bond rates very closely. The Dow Jones Corporate Bond Index (a broad investment grade index) fell 0.4% for the week continuing a trend started in late January but remains in a period of consolidation since September 2009. The 10-year treasury yield crept up 0.081% ending the week at 3.78%. I am not reducing my positions in bonds at this time, however, I am not overweighting in any portfolios. The Euro fell 0.17% for the week against the dollar as efforts to stabilize Greece continue. Germany and France continued to pressure Greece to reduce government spending by 4% in 2010. The reaction in Greece was somewhat predictable as the opposition party cried foul and included complaints that Germany never paid adequate reparations stemming from World War II. The Greek government announced that it was considering a $6.8 billion bond offering for the upcoming week. This will bear watching as a key indicator of the international market’s interest in Greek debt and the cost Greece will have to pay for these bonds. Even if this bond offering is successful there is another $20 billion in debt that must be raised to pay off maturing notes by the end of April. All of this will give us a clear indication of how lenders perceive the Greek and Euro Zone debt problems. Do not let last week’s action lull you to sleep in the international equity markets. US equity markets were up for the week. The Dow Jones Industrial Average (DJIA) rose 3% and the S&P 500 closed up 3.1%. For the year, the DJIA is down 0.25% and the S&P 500 is down 0.53%. Small and mid capitalization stocks continue to be favored over large cap. If you have any questions about the particulars of your portfolio please give me a call. 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. 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. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Dow Jones Corporate Bond Index is comprised of 96 investment grade issues that are divided into the industrial, financial, and utility/telecom sectors. They are further divided by maturity with each of the sectors represented by 2, 5, 10 and 30-year maturities.