Tuesday, July 27, 2010

The Weekly Update is back after missing the past two weeks due to illness and an unforgiving travel and work schedule. Over these few weeks the markets around the world have shown strength coupled with continued volatility.

For the month of July the Dow Jones Industrial Average (DJIA) has gained 650 points (+6.65%) closing at 10,425. The S&P 500 has kept pace gaining 72 points (+6.98%) closing at 1103. For the year the DJIA is essentially flat (down 3 points from its 2009 close) while the S&P 500 is off just over 1% (12 points below its 2009 close).

The MSCI (EAFE) World has continued its recent out performance of US indexes gaining 7.6% in July and cutting its 2010 losses nearly in half. For the year the MSCI (EAFE) is down just over 8%. The Euro also improved against the dollar closing Friday at $1.2904 up nearly 6 cents for the month. Both the MSCI (EAFE) World and the Euro slowed noticeably this past week leading up the widely anticipated release of the European Union's (EU) stress tests on the major banks. Those results were released early Friday evening in Europe and I will discuss them further below.

US treasuries have traded in a very tight range and closed Friday at 2.998%. As equity markets recover from their recent lows, it would be normal to see interest rates rise as investors reduce their "safe" holdings in treasuries and shift to more risky stocks. By remaining under 3% for now, investors are indicating that there may still be some leeriness about a more substantial return to stocks. US corporate bonds saw very small declines in their returns over the past week but are still showing positive growth for the month. If the strength in equity markets persists, expect most bonds to continue to slip. Two exceptions to this trend would be in high yield and international sovereign debt funds.

Gold pulled back early in the month but steadied somewhat last week. An ounce of gold settled on Friday at $1187.80 as European debt jitters eased and Fed Chairman Bernanke continued to forecast slower than expected growth easing inflation fears. Gold can continue to be held in portfolios as a hedge against the unknown.

Oil has continued to rise in July closing at $78.98 per barrel on Friday. The gain in oil prices has trended to move with the equity markets as oil traders see a stronger stock market as a proxy for future demand for oil. However, some analysts are voicing concerns that this link is breaking down as inventories rise faster than demand. Questions remain about whether the recent rise in stock markets is signaling a true recovery and the return to more robust economic growth and thus demand for oil.


July has been a very good month for stock markets. The most oft cited reasons for this has been the strong 2nd quarter earnings reports from US companies and the improved debt outlook in Europe. I share this enthusiasm tempered with my continued caution.

My caution comes from a number of concerns:

·First, my relative strength analysis of the five major asset categories (US stocks, International stocks, Bonds, Commodities, and Currencies) continue to favor Bonds and by default, cash. When this relationship exists, it is imperative to remain cautious.

·Second, a number of critical economic indicators remain negative or neutral at best. Jobless claims rose last week and overall unemployment is still at 9.5%. The White House's own economists expect the unemployment rate to remain above 8% in the lead up to the 2012 presidential elections. Additionally, new home starts are still far below average as are sales, and reports of rising foreclosure rates does not bode well for growth in this important sector.

·Third, rising federal deficits will become more problematic. This year's federal deficit is expected to be around $1.5 trillion dollars and the federal government is now borrowing 41 cents of every dollar spent. The government will be forced to cut spending and raise taxes to address this issue-not a recipe for growth.

·Finally, keep watching the quarterly GDP numbers. GDP growth between 2% and 3% would indicate the economy is simply marking time, below 2% and greater than 0% would say the economy is not growing enough to sustain itself, while below 0% would be a double dip recession. I am not suggesting that we will fall below 0%, but I believe those economists who are predicting the 2nd half of 2010 GDP growth to fall within 1.5% and 2%.

I do believe that it is possible to take some stock positions but only in the most technically sound investments.


A highly anticipated event was the release of the EU's stress tests on major European banks.

On Friday those results were published and to many investors' relief, only seven banks failed the stress tests indicating a need to raise a total of €3.5 billion ($4.51 billion) for proper capitalization. This was better than expected and may give European stocks a boost in the weeks ahead.

I am certainly pleased by this news; however, there is always a "but" these days. A number of analysts both in the US and abroad have voiced concerns at just how rigorous the tests were. Their concern centers around the issue that the evaluations did not test the default of any sovereign debt currently held on the banks' books. The risk of sovereign debt default is precisely what led Europe into its current debt crisis and to not test this scenario has cast some doubt on the results.

Looking Ahead

My generally cautious outlook on markets remains in place and I believe that it is better to take a more conservative position and give up opportunity rather than risking the loss of capital at this time.p> Until my major asset category relative strength analysis favors stocks, I will continue to underweight stocks. Remember that investing is not about today and tomorrow, but rather next month and next year. There is a lot of noise out there right now and it is imperative to keep short-term gains and losses in perspective.

With the good stock performance over the past couple of weeks, the New York Stock Exchange Bullish Percent (NYSEBP) has risen to 46.57% meaning that almost half the stocks traded on the New York Stock Exchange are now in a point and figure buy status. Even more importantly the trend now indicates that demand is back in control of stocks. Because of this, I will continue to look for limited exposure to technically strong stock investments.

For now, emerging markets continue to show greater relative strength on the international side. I also continue to favor small and medium capitalization companies over large ones. Growth is preferred over value.

For bonds I favor high quality corporates and foreign sovereign debt. High yield bonds are attractive as they correlate to the stock markets well. One point of caution...small and mid cap stocks, emerging markets and high yield bonds all tend to have higher volatility than large cap companies and investment grade bonds. So keep that in mind as portfolio values surge up and down in the daily battle between the bears and bulls. Do not take on more risk than you are comfortable with, and open your statements when they come in the mail.

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

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

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


Paul Merritt, MBA, AIF(R). CRPC(R) Principal NTrust Wealth Management

Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions.

Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable, however NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.

The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.

All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Dow Jones Corporate Bond Index is comprised of 96 investment grade issues that are divided into the industrial, financial, and utility/telecom sectors. They are further divided by maturity with each of the sectors represented by 2, 5, 10 and 30-year maturities. The Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks traded on the major exchanges around the globe.

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