Wednesday, July 13, 2011

Markets have been moving sharply since my last update. The last week in June saw all US major indexes surge over 5% followed by a leveling off last week. The extremely poor US employment report released on July 8th will weigh heavily on investors minds going into the new week. Europe has released additional funds to help Greece meet its most immediate needs, but a sharp sell-off in Italy on Friday has raised new worries about the strength of Europe. China's inflation rate reach 6.4% causing worries about forcing the government there to further reign in growth, and US politicians seem increasingly unable to reach a long-term compromise on US spending and tax reforms.

So far in the month of July, the Dow Jones Industrial Average (DJIA) has gained 243 points (2.03%) to close at 12,657 and the S&P 500 has gained 3 points (-0.24%) to close at 1344. The Russell 2000, an indicator of smaller capitalization stocks, posted a solid gain of 3.04%. For the year the DJIA is now up 9.33%, the S&P 500 is up 6.85%, and the Russell 2000 is up 8.97%.

Sector returns in July have seen a significant improvement in the Information Technology sector and continued strong performance in Real Estate. In addition, Consumer Discretionary, Materials, and Energy all bested the DJIA while Utilities, Health Care, and Financials are the bottom three performers. For the year, Health Care, Real Estate, Energy, Consumer Discretionary, Consumer Staples and Telecom have all posted double-digit gains and are ahead of the DJIA. Only Financials have significantly underperformed the main indexes and remains negative for the year.

International markets have not shared in the strong performance seen here in the US recently. The MSCI (EAFE) index is down 0.73% for the month and is up just 2.96% for the year. Developed Europe has seen strong sell-offs so far in July with the deficit crisis still dominating investors concerns. Italy, Spain, Greece, and Portugal are four of the five worst performing countries in July while strength has emerged in Asia with good returns in Thailand, South Korea, and the Philippines. Just over halfway through the year, Emerging European countries hold most of top spots of my list of countries while the Middle East owns the majority of bottom performers. Developed countries in general are outperforming emerging markets.

Commodities have been bolstered this month by a surge in gold prices. Gold has jumped $38.80 an ounce (2.58%) since the start of the month helped by a $59 gain just this past week to close on Friday at $1541.60. Clearly concerns about political and economic turmoil both here in the US and in Europe have contributed to gold's recent gains. Oil has increased $0.78 in July to close at $96.20 and is now up $4.98 (5.46%) for the year. Oil did see a drop of over $2 per barrel on Friday following the release of week jobs data here in the US. The Dow Jones UBS Commodity Index has gained 1.7% in July primarily on the strength of precious metals but remains down about 1% for the year.

Bonds suffered during the gains in equity markets the end of June but rallied significantly in the last couple of days. The 10-year Treasury yield closed Friday at 3.022% reflecting investor concerns over the strength of the US recovery while short duration bonds have underperformed so far in July. The Barclays Aggregate Bond Index is now up just under 3% for the year.

WHERE OH WHERE ARE THE JOBS?

The US unemployment rate jumped to 9.2% in June with only 18,000 jobs being added. Additionally, May's figure was revised downward to 25,000 from a previously reported gain of 55,000. There was no good news in the report anywhere and has raised serious concerns about the strength of the US economy going into the second half of 2011. If you factor in those workers who just quit working, the jobless rate goes to 11%. The best spin that can be put on this dreadful number is that unemployment has traditionally been a lagging economic indicator and that supply disruptions coming from Japan will be lessened as that country rapidly comes out of the stresses caused by the earthquake and tsunami. Manufacturing is still growing slightly and may improve if parts from Japan arrive here in pre-quake quantities.

The challenge is that employers are not going to start hiring more workers unless there is more economic activity, but economic activity will not improve without more people working and willing to spend. The drop in oil prices will help, but not unless the price of oil falls well below current levels. The White House blamed the ongoing debt ceiling impasse for employer unwillingness to hire, but in my opinion that is simply trying to make a bad day less bad. The markets, in my opinion, have already priced in that Congress will raise the debt ceiling and that the US will not default on its debt, so a favorable solution to this uncertainty will help, but I am not sure if it will enough to turn around employment numbers in a meaningful way.

Pressure is mounting on the Federal Reserve to do more than just keeping interest rates low, but so far, Chairman Bernanke has not shown much willingness to start buying more bonds (Quantitative Easing III). Economists will now begin to relook their 2011 growth projections and I would expect to see growth estimates drop to under 3% if for no other reason than we are simply running out of time this year. Pressure is also mounting on the White House. The closer we get to the 2012 election (now just 17 months away), the more likely new initiatives will be put forth for an uncertain result. At this point, I do not see much relief to these dismal numbers. Interest rates will offer some insight on how investors perceive the strength of the economy so watch the 10-year Treasury yield closely.

LOOKING AHEAD

This coming week marks the beginning of 2nd Quarter corporate earnings announcements. Good earnings numbers will help stem the worry surrounding the unemployment data and may boost the markets. If the numbers fail to meet expectations, I fear that the recent gains in the markets will be hard to hang on to.

My technical analysis is essentially unchanged. Stocks are still favored over bonds, small and mid-capitalization stocks favored over large. Growth over value, and equal-weighted indexes over capitalization-weighted. The New York Stock Exchange Bullish Percent (NYSEBP) did reverse last Wednesday into a column of X's meaning that there is more demand for stocks for now. Large capitalization stocks have shown signs of life and while I continue to prefer small and mid-capitalization stocks, I believe that large growth stocks will not be a drag on portfolio returns.

I maintain my comments about sectors. While I have no significant preference within the various broad economic sectors other than avoiding Financials, I am concentrating more on Health Care, Consumer Staples, Real Estate, and Energy. Utilities have proven to be a good bond-alternative option within the equity space.

International investments maintain a greater degree of risk in my opinion given the struggles in the Euro zone with Greece and other countries (Italy for now). I am not looking to add to international positions for now and would use weaker positions in your portfolio to raise cash.

Commodities have come under stress recently but over the longer-term precious metals and energy remain favored. Oil is in a negative trend so I am less committed to oil in the near-term than I have been. Please keep in mind that commodities is a highly volatile asset class and entering positions in this category should be done so with the understanding that you are likely to experience greater volatility than with many other investments.

Bonds have been a stable investment so far in 2011. With the pullback late in June, bonds are not nearly as overbought as they had been and I believe remain attractive for now. I prefer high quality corporates, emerging market debt, and TIPs.

There are no major economic reports due out this week, however, the Initial Jobless Claims (Thursday), Retail Sales (Thursday), the Producer Price Index (Thursday), and Consumer Price Index (Friday) will all be watched closely. Earnings reports will be the focus of the week and may help the market if companies show strong earnings.

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 Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. 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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