Monday, October 4, 2010

Stock markets at home and abroad cooled last week, but September 2010 will go down as the best September since 1939.

For the week the Dow Jones Industrial Average (DJIA) lost 31 points (-0.28%) and the S&P 500 lost 2 points (-0.21%) marking the first down week after four consecutive weeks of gains. For the month of September the DJIA gained 7.62% and the S&P 500 gained 8.63%. As of market close on Friday, the DJIA is up 3.45% for the year and the S&P 500 is up 2.34%.

Energy, Telecom, and Utilities were the best performing broad sectors while Technology, Real Estate, and Financials lagged. Real Estate, Consumer Discretionary, and Telecom have the strongest technical scores indicating greater relative strength over the past six months or so, while Financials, Health Care, and Energy continue to be at the bottom. Smalland Mid-capitalization stocks continue to outperform large cap stocks, and the equal-weighted S&P 500 index outperformed the capitalizationweighted index.

The MSCI (EAFE) World Index posted a modest gain of 0.20% last week and for the month of September gained a strong 9.33%. For the year, this broad international index is down just 0.82%. This past week saw Brazil take the top spot for the countries I follow for the first time in quite a while, followed by Thailand and Turkey. Spain was the worst performer along with Switzerland and France. Spain's troubles were primarily a result of a credit rating cut by Moody's Investment Services on Thursday. Don't take your eye off the European sovereign debt situation.

The big story of the week has been the surge in commodities. I believe this is primarily attributable to the renewed strength of the Euro and the general weakness of the US dollar. Friday's Euro close of $1.3790 was nearly a 3 cent gain from last Friday's closing Friday of $1.3491. This marks an 8.28% gain since the last Friday in August and puts the Euro within 5.25 cents of its 2009 closing of $1.4316. This is a continuation of the narrative from last week's update where I discussed the impact of the Fed's possible return to "quantitative easing."

Gold continued to climb closing the week at $1318.80 and oil broke through $80 to close at $81.58. A weaker US dollar makes commodities cheaper to non-US dollar buyers. Nearly all commodity contracts are conducted in US dollars and international buyers must convert their currencies into US dollars when they buy. When the US dollar is weak, the effective cost to non-US buyers falls. Basic economics says that demand will rise when goods become less expensive and this is certainly happening to most commodity prices right now. Good manufacturing data out of China also helped spur demand for all commodities.

US Treasuries pulled back slightly this week with the 10-year yield closing up to 2.6250% from last week's close of 2.6070%.

THE DOLLAR IS FALLING

Countries devalue their currencies for very selfish reasons. Principally they want to drive internal economic growth through exports and a cheap currency helps do that. Members of the Federal Reserve spoke all during the week discussing the pros and cons (mostly pros) of the Fed taking renewed action to help jump-start the economy through the purchase of US Treasuries. There are many long-term political and economic problems with this cheap dollar strategy which I simply cannot summarize in a short update, but economic historians look at the Great Depression in the '30's and Japan in the "80's and '90's for examples of the long-term economic harm that can come from this type of policy.

However, the stock market likes this kind of support today. Dollars sloshing through the US economy find their way into the stock market (anyone remember what happened in 1999 as the Fed significantly increased the supply of money in anticipation of Y2K) and stock valuations inevitably rise. The great September in markets here and abroad came at a time when economic data has failed to show any appreciable recovery. Whenever I read a headline today the economic news is still bad, just not as bad as it has been. The economy is expanding but at an ever slowing rate. Most economists now believe the likelihood of deflation or the US going into a second recession is remote and certainly factored into September's gains. However, part of the reason the US markets were down last week was attributable to the reality that economic data just isn't good. So the tug-of-war continues and I anticipate these markets will continue to be sensitive to releases of economic data.

Looking Ahead

The most significant economic data point to be released next week is Friday's unemployment report. Consensus is anticipating the unemployment rate to remain around 9.6%. The real focus will be on private sector job creation. I do not expect a great number, but as I have sad, numbers do not have to be great these days to get a strong move in the market.

We are now down to the last four weeks before the mid-term elections. The markets are likely to rally on the election of more "business friendly" legislators. I will follow this and other developments closely.

US equities and International equities are my preferred asset classes at this time. The greatest strength remains in the small and mid-capitalization stocks. Expect commodities to continue to show strength if the US dollar continues to fall against the Euro and other currencies. Emerging markets remained favored over developed ones especially in Asia and Latin America.

International bonds, particularly those from emerging market regions have shown recent strength. US bonds continue to hold their own and have proven to be a solid investment this year. I believe yields are what they are and will remain steady for the foreseeable future.

Gold is at record highs and will continue to trade at these levels for now.

On a different note, I want to draw your attention to a story in the Wall Street Journal on October 2nd regarding the break-up of an international computer-crime ring that is accused of stealing $70 million primarily from businesses and municipal governments. While individuals were not the primary target this time, I want to remind each of you to review your statements closely each week. I have encountered friends and clients who have been affected by these types of criminals who took small amounts (under $50) from their accounts. Please pay attention to the details of your statements.

If you have any questions about the overall relative strength of your portfolio and would like my analysis, please do not hesitate to give me a call.

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

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

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

Sincerely,

Paul Merritt, MBA, AIF(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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