Tuesday, March 8, 2011

Unrest continued in the Middle East this past week, with little hope of resolution causing oil prices to continue their dramatic rise. US economic data was generally positive, and the president of the European Central Bank sees the threat of inflation growing.

Stock markets both here and abroad were volatile but ended the week with slight gains. The Dow Jones Industrial Average (DJIA) gained 39 points (+0.33%) to close the week at 12,170 and the S&P 500 added 1 point (+0.10%) to close at 1321. For the year, the DJIA is up 5.12% and the S&P 500 is up 5.05%. The Russell 2000 gained 3 points (+0.37%) and for the year is up 5.28%.

Among the broad economic sectors in the US economy, two traditionally defensive sectors Health Care and Utilities were the top performers along with Materials (boosted by coal and mining stocks) last week while Financials, Telecom, and Real Estate were the bottom three sectors. Year-to-date Energy is dominating all sectors up over 14% followed by Information Technology and Health Care taking over the third position. Telecom, Consumer Staples, and Materials are the bottom three. Telecom continues to be the only sector negative for the year.

The MSCI (EAFE) World Index gained 0.82% for the week and is now up 5.27% for the year. For the week, strength moved east as countries like Pakistan, South Korea and India were the best performers while Middle Eastern countries, not surprisingly, were the worst performers. Peru is the one non-Middle Eastern Country that found itself in the bottom five last week. For the year, Europe continues to lead all countries in total performance while Egypt, UAE, Qatar, Peru, and India remain solidly at the bottom. China has recently been showing some strength and will bear watching.

The Euro continued to make solid gains against the US dollar last week closing just below $1.40 at $1.3987 compared to the previous week's close of $1.3754. The Euro will continue to attract buyers over the US dollar following comments from the European Central Bank President, Jean-Claude Trichet warning Thursday about the potential for inflation and said that a hike in interest rates was possible in the next few months. Compared to the Federal Reserve Chairman's continued support of an accommodative monetary policy (low interest rates), it is clear to currency investors that non-US bonds are a better investment. Strength of the Euro will continue as long as the European Union can resolve the terms of their debt bailout facility in the next month. Always reminding us that the debt problem is never far away, Fitch announced that they were downgrading Spain's outlook from "stable" to "negative" on concerns over bank restructuring. Early Monday morning (March 7th) Moody's announced a major reduction in Greece's debt rating three notches to B1 from Ba1. These moves push Greece's rating deeper down into junk status.

Gold gained $19.10 (+1.36%) per ounce on Friday to close the week at $1428.40. For the year, gold is up 0.61% with gains of nearly 6% in the last 30 days. Gold remains an important hedge against uncertainty.

Oil was the biggest mover in the commodity space again last week. Oil gained $6.85 per barrel (7.00%) for West Texas Intermediate and closed at $104.73. I suspect the huge swings in oil prices will continue for now. I also know that we are all feeling the impact at the gas pump. A week ago I paid $3.49 per gallon for premium in Virginia Beach, and today (Sunday, March 6th) I paid $3.65 a jump of $0.16 (4.6%). The price of oil, if it continues at this level, will negatively impact the current recovery here in the US as well as abroad. Most economists, however, cannot say how high oil must go and for how long before the economy begins to see an oil-related slowdown. On more reason I like to follow the numbers and look for the trends to develop with the help of Dorsey Wright & Associates.

Bonds pulled back a bit last week. The 10-year Treasury yield closed Friday at 3.494% slightly higher than the previous week's close of 3.415%. The 30-year Treasury yield also increased at a slightly greater rate than the 10-year causing the "spread" or the difference between the 10-year and 30-year yields to widen slightly. The 30-year Treasury is most sensitive to anticipated interest rate/inflation increases. The Barclays Aggregate Bond Index, representing a broad basket of US bonds, fell 0.05% for the week but remains positive (0.17%) for the year.

KEY HEADLINES

I am not going to dwell on the turmoil in the Middle East. It speaks for itself. However, the long-term impact of high oil prices will serve to slow global growth and any further interruption of oil supplies will create an immediate and very difficult economic environment.

Commodities in general have continued to post gains. The weakening of the US dollar is a major driver in higher commodity prices. A perceived growing global economy is also adding to the higher prices. Please keep in mind that commodities are a very volatile investment and can change direction quickly, and any investment in this area should be measured.

The US unemployment report came in moderately positive with a net gain of 192,000 jobs and the overall unemployment rate fell to 8.9%. This is the minimum rate of growth necessary to start making an impact in the serious unemployment problem that has been in place for the past two years. I applaud this number, but the country needs consistent monthly gains of 250,000 to indicate that the economy is really picking up steam. Additionally, the overall unemployment rate is falling mainly because the Department of Labor has taken hundreds of thousands of workers out of the labor pool in the last six months. If any of these people start looking for jobs, the stated unemployment rate will reverse course and start rising.

The Europeans are continuing their meetings to reach an agreement on the bailout fund which has helped countries like Greece and Ireland get their borrowing on an affordable and sustainable path. The Irish are expected to come back and try to renegotiate the rates on their bailout package and with Spain's downgrade by Fitch, the work by the debt committee gains in importance. A successful conclusion of this plan will be a strong boost to Europe.

Looking Ahead

The unrest in the Middle East continues. Gadhafi has shown that he will take any measure to hold onto power, and it is doubtful that without a strong intervention by the US or Europeans, Libya's troubles will continue for the foreseeable future keeping energy markets on pins and needles. The Saudi's have come out and said any demonstrations are illegal under Saudi law and will not be tolerated in anticipation with this Wednesday's (March 9th) scheduled protests. The stability of Saudi Arabia is critical.

The gaining strength of the US economy pushing against the uncertainty of the world's oil supply and oil prices has investors without a clear signal in market direction. Looking at my Point and Figure charts of the DJIA and S&P 500, this could not be clearer. Buyers and sellers are currently in a battle for supremacy and I will be watching closely to see which direction the charts break. A move to 12,300 by the DJIA will be a very positive sign, while the DJIA at 12,000 or below will be a negative. For the S&P 500 a move to 1350 will be a positive sign, while a move to 1290 will be negative. For the week, the New York Stock Exchange Bullish Percent (NYSEBP) remains in a column of X's (demand in control) at a strong reading of 77.14.

Equities remain favored over bonds. Small and Mid capitalization stocks are favored over large cap, and growth is favored over value. Energy, Industrials, and Technology are my favored sectors, and I still favor Emerging Markets over Developed (although both are doing well).

International bonds have started to show strength as interest rates gain abroad and the US dollar weakens. I prefer corporate bonds over municipals or Treasuries, and I continue to like high yield and preferreds.

Commodities will remain volatile. I continue to believe that oil prices are very sensitive to the uncertainty in the Middle East and any threats to supply in any of the oil producing countries will cause a sharp increase in prices. A falling US dollar will also contribute to an increase in commodity prices in general. I believe that if you own gold, keep it. Gold remains a hedge against the global uncertainties. I see no reason at this time to sell any commodities in portfolios.

This market remains volatile and challenging. Stay alert and pay attention to your portfolios and 401(k) plans.

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.

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.

Emerging market investments involve higher risks than investments from developed countries and also 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.

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, this is a market capitalization weighted index, meaning the largest companies in the S&P 500 have a greater weighting than smaller companies. The S&P 500 Equal Weighted Index is determined by giving each of the 500 stocks in the index the same weighting in 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 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. The Russell 2000 Index is comprised of the 2000 smallest companies within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.

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