Tuesday, May 17, 2011

US markets were mixed while European markets continued to sell off under mounting pressure from Greece's debt problems. Commodities, like stocks, moved mostly sideways. In general, the week was bumpy but when the markets closed on Friday, there was little change from the previous week.

For the week, the Dow Jones Industrial Average (DJIA) lost 43 points (-0.34%) to close at 12,596 and the S&P 500 lost 2 points (-0.18%) to close at 1338. The losses on the DJIA were spread across several sectors including financials, industrials and technology. JPMorgan posted the largest weekly drop (-4.20%) followed by Cisco, Caterpillar, Microsoft, and Bank of America. Smaller and middle capitalization stocks did slightly better with the Russell 2000 gaining 0.18%. For the year the DJIA is now up 8.79%, the S&P 500 is up 6.56% and the Russell 2000 is up 6.64%.

None of the broad sectors did especially well, but Consumer Staples, Health Care, and Utilities were the top three and all posted gains of greater than 1% while Financials, Materials, and Energy were the bottom three. Among more narrowly defined sub-sectors mining and banking were down more than 4%.

International markets lost again this week with the MSCI (EAFE) World Index down another 2.15% for the week and is now up just 3.60% for the year. Emerging markets continue to show increasing weakness and as a general category is now underperforming developed markets by nearly 5%. The big four in emerging markets are all posting disappointing numbers so far in 2011. For the year, Russia is the best performing country up 4.49% followed by China which is up 2.45% while Brazil is off 7.85% and India is down 10.12%. Each of these countries is struggling with growing inflation worries and are responding by trying to reign in economic growth through a variety of strategies.

The Euro lost another 2 cents (-1.40%) against the US dollar closing Friday at $1.411. The Euro has given back 7 cents or 50% of its yearly gain on the US dollar so far in May. The Euro's difficulties center on growing concerns over Greece's debt problems and recent remarks by the European Central Bank president who signaled there would be no further increases of interest rates in the near term. The Euro's weakness and growing strength of the US dollar will certainly act as a partial brake on any significant rally in commodities.

After all the drama in commodities in the previous week, most commodities stabilized last week. West Texas Intermediate (WTI) oil closed Friday at $99.65 up $2.47 (2.54%) for the week on more fundamental concerns over global oil supplies. The Department of Energy reported that overall oil consumption in the United States is running about 1 million barrels a day less than just one year ago bringing daily consumption down to 18.16 million barrels a day. Clearly, $4 gasoline is having an impact on demand.

Gold gained a fractional $2.60 per ounce (0.17%) to close at $1493.60. Silver lost around 0.20%. For the year gold is up just over 5% and silver remains up approximately 18%. Commodities in general were up about 0.20% for the week and for the year a broad basket of commodities is down 1.57%. I am unsure if this is a pause or the beginning of a more substantial correction following two consecutive years of double-digit growth. As I discussed in detail last week I do know that this correction/pause in commodities is fairly typical and the majority of commodities are still trading in a positive trend.

The Barclays Aggregate Bond Index posted its fifth straight week of increases gaining 0.06% for the week. This broad-based US bond index is now up 2.49% for the year. The US 10-year Treasury yield rose incrementally from 3.155% to 3.172% last week. Bonds in general are benefiting from the sell-off in the commodity market and benign economic data indicating the the US economic growth appears to be tepid reducing the likelihood that the Federal Reserve will be raising rates any time soon. For the week, municipal bonds showed unusual strength leading the many categories of bonds. Preferreds and emerging market debt also performed well. International treasuries and US Treasury Inflation Protection Notes (TIPs) were the worst performers last week.

A QUIET WEEK

Last week was a relatively quiet week in US markets. Sideways markets are indicative of confusion or uncertainty among investors. There is not consensus about what is going on. This is not surprising given the mixed signals coming from economic data. The April Consumer Price Index (CPI) was released Friday morning and showed overall inflation up 3.2% year-over-year, however, the critical (from the Fed's perspective) core inflation data rose by just 1.3%. Gasoline has jumped 33% and as noted earlier, is pushing consumption down in the US. The bond market concluded (correctly in my opinion) that the Fed will not be raising interest rates here any time soon which is seen as a positive. Jobs data saw a modest gain in private jobs growth, but then the overall unemployment rate increased from 8.8% to 9%. The most concerning report to me was a report issued on May 9th by Zillow, Inc. showing that 28% of US homeowners are now underwater on their mortgages.. The internet home value company said that they expect home values to fall another 9% above the 3% they have fallen already in 2011 and that a floor on valuations will not occur until sometime in 2012. Housing will continue to be a drag on the economy.

On the international front the news has been more negative. China raised the reserve requirement for banks 0.5% in response to their April inflation report showing inflation holding around 5.3%. This increase raises the overall reserve requirement to 21% compared to 10% here in the United States. It is difficult to compare the US to China directly because the regulatory environment is very loose in China. Greece's debt problem is so dire that the European Union (EU) is going to be forced to come up with more cash to get Greece through the next few months. Even if the EU is able to arrive at economic and political solutions for now, the reality of the overhanging fear that Greece's debt may never be repaid remains. The private bond market has no interest in buying Greek debt and is demanding an extraordinary premium to compensate investors for the growing likelihood that Greece will be forced to default in some manner in the future. In the meantime, the economic strength of the northern European countries (Germany, France, and Finland) continues to increase while the southern countries (Spain, Portugal, and Greece) weaken. This good news-bad news story puts additional stresses on the EU.

When you mix all of this information together you get a jittery market with no clear direction.

LOOKING AHEAD

Three late breaking news stories may have an impact on the markets this coming week. First are reports coming from Israel on Sunday evening of three well coordinated attempted breaches of Israeli border crossings with Syria, Gaza, and Lebanon resulting in the deaths of at least 13. Oil markets are already worried about unrest in the Middle East and this news may easily overshadow the second news item being President Obama's announcement on Saturday that he was going to expand oil leases in Alaska, the Gulf of Mexico, and the Atlantic coast. When President Bush took a similar tact in 2008 the price of oil dropped dramatically in anticipation to this new supply. I am not expecting an immediate reaction in oil prices until all the details of this announcement are parsed by investors. The third story came early Sunday morning with the news that International Monetary Federation (IMF) chief, Dominique Strauss-Kahn, was arrested late Saturday evening for variety of charges stemming from an altercation with a chambermaid at his hotel in New York City Saturday afternoon. Mr. Strauss-Kahn is a leading candidate in France's upcoming presidential campaign and seen as a serious challenger to Nikolas Sarkozy's bid for re-election. This story may have a greater impact on France than the EU, however, the timing of this arrest adds to the uncertainty during this crucial stage of the Greek debt debates.

My overall guidance remains in place. US stocks and commodities are favored over International stocks, Currencies, and Fixed-Income. Small and mid-capitalization stocks are favored over large cap. I continue to favor equal weighted indexes over capitalization weighted ones.

Commodities remain a favored asset category, but I am watching these investments closely. If you are getting nervous about investments in this area, I would encourage you to revaluate your holdings and trim if necessary.

I have made no changes to my sector recommendations. I favor Health Care, Energy, and Industrials along with Real Estate and Consumer Discretionary. The sector that I continue to avoid is Financials-especially banking. The mortgage mess and housing market is far from fixed and banks with exposure to these losses do not look attractive.

Bonds are bonds. They are not providing any major gains so far in 2011 and there is no expectation that this will change. If you own bonds for income, you are happy. If you own bonds to avoid volatility in your portfolio value, you are happy. If you own bonds for capital appreciation, you need to be elsewhere. I prefer corporates and preferreds. High yield bonds are still strong on a relative strength basis. I also like international bonds as a protection against a weak US dollar. I do not like US Treasuries, especially longer duration bonds.

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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