Wednesday, July 27, 2011

US and global markets posted strong gains this past week on news that the European Union had settled on a plan to deal with Greece's debt crisis and a continued expectation that US political leaders would reach some agreement before the August 2 debt ceiling increase deadline.

For the week, the Dow Jones Industrial Average (DJIA) gained 201 points (1.61%), the S&P 500 added 29 points (2.19%), and the Russell 2000 increased 13 points (1.57%) moving all of the major indexes solidly into positive territory for July. For the year the DJIA is up 9.53%, the S&P 500 is up 6.95%, and the Russell 2000 is up 7.42%. The NASDAQ, a technology heavy index that I have rarely discussed recently, posted a weekly gain of 2.47% to beat all the major indexes and moved it nearly 1% higher than the S&P 500 so far in 2011.

Every sector was positive last week except for Telecom with Energy, Information Technology, Real Estate, Financials, Materials, and Consumer Discretionary exceeding the DJIA's weekly return. Financials finished fourth last week on the news of Europe's announcement that a deal had been reached in regarding Greece. I will discuss this further in the next session. For the year, however, Financials still remain in negative territory. Energy, Health Care, and Real Estate remain firmly as the top three sectors so far in 2011 while Financials, Materials, and Industrials are the bottom three performers.

International markets responded positively to news that an agreement had been reached in dealing with Greece for now. The MSCI (EAFE) index gained 2.62% for the week making it the best week for this broad international index since April 8. For the week, developed countries led all major asset class returns and beat emerging markets by over 1%. For 2011 developed countries have outperformed emerging markets, but both significantly trail US equities and commodities.

The news on Greece carried over to the Euro which strengthened two cents against the US dollar to close the week at $1.436. The NYCE US Dollar Index, which is heavily Euro-weighted, has remained in a negative trend now since June 2010 but rebounded very slightly on Friday as investors still remain wary of the European Union's (EU) ability to extricate themselves from their on-going debt problems.

Commodities continued to rebound in July especially in gold and silver. For the week, gold added $12.60 (0.79%) an ounce to close at $1602.70 and is now up 6.65% for the month and 12.89% for the year. The Dow Jones UBS Commodity Index, a broad basket commodity index, was up 0.47% for the week and is now up 1.78% for the year. Not making the headlines has been the pullback of cotton which is now down 18% in July and has turned negative (-16.7%) for the year. Other commodity movers in July are Sugar (20.2%), Silver (15.5%), and Grains (15.5%) while Coffee (-8.7%) and Timber (-2.8%) join cotton as the bottom performers. WTI Oil added $2.47 to close the week at $97.71 and is now up 9.31% for the year. At one point last week, WTI reached $100 put pulled back. While there is no immediate plan to dip again into the Strategic Oil Reserves, if oil prices continue to rise, there may be another release which will hold oil prices down. A strengthening US dollar will also have a negative impact on oil and commodity prices in general.

The bond markets have been tame leading into the potential debt ceiling deadline of August 2nd. The Barclays US Bond Index fell just 0.07% last week and the 10-year Treasury yield climbed slightly to close the week at 2.958% up from last Friday's close of 2.905%. International Treasuries and US High Yield bonds were the best performers for the week while longer-term and intermediate term US Treasuries were the worst.


The negotiations taking place in Washington and Brussels dominated the financial headlines this past week. Slipping under the radar was another terrible jobs report which showed first time unemployment numbers coming in at 418,000. The markets were helped by above expectations earning announcements (except for Caterpillar), and a belief that earnings announcements in the coming weeks will continue to be positive.

The Europeans announced on Thursday that they had reached a broad compromise on Greece's crisis by committing to a second outright bailout of €109 billion ($156.5 billion), an expansion of the European bailout fund and uses of that fund, private sector participation, and a reluctant concurrence from the European Central Bank (ECB). Everyone got a little and gave a little in this agreement. For Germany, this means opening up their treasury to continue funding the debt problems of Greece in return for private bond holders absorbing some of the losses on bonds as they are restructured. This means that Greece will enter into a "technical default" for the bonds that are rolled over into new bonds at extended maturities (15 and 30 years) at below market valuations and coupons. The amount of losses incurred by private lenders will be dependent on the type of bonds they agree to accept. Additionally, the European bailout fund may now be used in advance of other country's problems in an effort to avoid a crisis situation including providing capitalization for troubled banks. The ultimate test of this deal will be whether or not Greece can return to a growing economy capable of sustaining itself.

Here in the United States, the assumption that Congress and the President will be able to find some agreement to stem a potential default on August 2nd is coming under increasing doubt. I will not get into the details of these discussions or whether or not the US will actually default on its obligations if an agreement is not reached, but clearly the markets will not be comfortable if no deal is reached. I am writing this update late on Sunday afternoon and Asian markets have not started trading, nor have US stock futures, so it is difficult to say just how impactful the debt negation impasse that emerged Friday evening will have on the markets. I will say that if Moody's, Standard & Poor's and Fitch Rating Services do go ahead and downgrade the US credit rating it will have a significant impact on markets and may also have ramifications on the many states, municipalities, pension funds, banks, and insurance companies that hold large quantities of US debt.


The debt ceiling negotiations will continue to dominate headlines. I cannot imagine that the markets will not be at least a little spooked by what is happening in Washington. In addition to this important issue, the first estimate of the US 2nd Quarter Gross Domestic Product (GDP) will be released on Friday at 9:30 AM. Preceding this critical piece of information will be releases of the Consumer Confidence Index and New Home Sales (Tuesday morning) and Thursday's release of Initial Jobless Claims. If these numbers are poor (which they are expected to be) combined with uncertain debt ceiling negotiations, it may be a tough week in the markets. Offsetting this negative trend is the expected strength of US corporate earnings announcements which will peak this week for the 2nd Quarter. Strong earnings by most corporations have, and will expect, to help offset the broader economic concerns in investor's minds.

The technical analysis of the markets has been unchanged for some time now. US Stocks and Commodities remain the favored asset classes followed by International Stocks, Foreign Currencies, Bonds, and Cash. Within US Stocks, small and mid-capitalization stocks are favored, growth is favored over value, and equal-weighted indexing is favored over capitalization-weighted indexing.

My sector analysis has likewise not changed. Energy and Health Care are preferred along with Consumer Noncyclical. I continue to avoid the Financial sector.

Within Commodities I continue to favor Precious Metals and Energy.

The International Sector showed some improvement last week and may continue to rebound on the news about the Greek bailout, however, from a technical basis, this sector is not favored and investments here should be carefully evaluated and only the strongest technical investments should be held. From a longer-term perspective, I prefer Emerging Markets over Developed Markets.

Generally bonds have remained a good place to hold cash. I prefer US corporate bonds and International bonds. US Treasury Inflation Protection notes have performed well and I like this as a hedge against the risk of rising interest rates.

While some doubts have been eased in Europe, uncertainty here at home continues to rise. Gold prices reflect investor uncertainty. I will be monitoring events here and abroad closely, and will communicate with my clients as needed.

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.


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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