Thursday, August 4, 2011

Markets here and abroad sold off this past week on news of the continued political stand-off in Washington and the absolutely terrible US Gross Domestic Product (GDP) data.

For the week, the Dow Jones Industrial Average (DJIA) lost 538 points (-4.24%), the S&P 500 shed 53 points (-3.92%), and the Russell 2000 retreated 45 points (-5.32%). These losses were the worst one week drops so far in 2011 for each respective index. For the month of July, the DJIA finished down 2.27%, the S&P 500 was down 2.15%, and the Russell 2000 was down 3.67%. For the year, each of these major indexes is positive with the DJIA leading gaining 4.89%, the S&P 500 is up 2.75%, and the Russell 2000 is up 1.71%. Since the end of the February, the markets have generally drifted downward with increasing volatility.

Every sector was down last week. The Utilities sector was the best performer losing just over 2% followed by Consumer Staples and Real Estate. Industrials was the worst performing sector losing over 6% followed by Health Care, and Telecom. For 2011 the top three performing sectors are Energy, Real Estate, and Health Care. The bottom three are Financials, Industrials, and Materials. The Financial sector is leading all sectors to the downside with a loss of over 5%.

International markets were also down but not as severely as US markets. The MSCI EAFE Index dropped 1.46% for the week and is up 1.3% for the year. Persistent worries about the continued spread of the debt crisis beyond Greece's borders to nearby Italy and Spain continue to weigh on European markets. The performance gap between developed markets and emerging markets remains fairly narrow with about a 2% differential favoring developed markets.

The Euro added less than a penny against the US dollar last week to close at $1.440. For the month the Euro lost one cent and for the year is up just over ten cents (7.71%). The Japanese Yen and Swiss Franc have been the primary beneficiaries of investors leaving the US dollar and Euro over the growing uncertainty in the US and Europe with the Yen and Franc gaining 12% and 33% respectively against the US dollar in the past 12-months.

Gold gained $28.30 (1.77%) last week to close at $1631.00 which completes a nearly 9% rise in price for July and a 14.88% increase for 2011. The increase in gold prices reflects the uncertainty swirling in the markets. Simply put, the greater the uncertainty, the higher the price of gold. I use gold prices as my primary barometer to gauge fear and uncertainty in global markets.

WTI oil dropped $3.85 (-3.86%) per barrel but remains up $0.44 (0.46%) for the month of July and up $4.64 (5.09%) for the year closing Friday at $95.86. Oil prices tend to reflect anticipated supply and demand views by investors and with the US GDP numbers so poor, the markets are anticipating a drop in demand for now. One interesting fact to the contrary was reported this weekend in The Wall Street Journal whichwas that the number of fully loaded oil tankers in the US Gulf of Mexico has increased dramatically recently suggesting that the owners believe the price of oil will continue upwards after the Strategic Petroleum Reserve release has moved through the market. By holding oil in tankers offshore , the owners are betting that by delaying delivery of the physical oil will get them a better price even considering the costs of holding a ship and crew at anchor offshore.

The Dow Jones UBS Commodity Index measuring a broad basket of commodities was down 1.49% for the week but was up 2.96% for July. Oil had the most downward influence on the Dow Jones UBS Commodity Index last week which was partially offset by precious metals.

The bond markets have remained subdued during the frenzy of political debates in Washington. The Barclays Aggregate US Bond Index gained 0.71% last week and is now up 4.65% for the year. The 10-year US Treasury fell to 2.798% on Friday reflecting a more negative economic outlook in the US, not a fear of default. With the rather strong drop in US Treasury yields, longer-term Treasuries were the best performing part of the bond market. Treasury Inflation Protection Notes (TIPs) were also one of the strongest performing sectors. Preferreds and high yield bonds were the worst performers.


The 24-hour news cycle has been reporting on the debt ceiling "crisis" non-stop this past week. I think every senator and representative in Congress has been interviewed at least once on TV this week and the talking heads are debating how severe the market turmoil will be if an agreement is not reached. Let me suggest to you that the more substantial problem is the abysmal performance of the US economy not what Washington does about the current debt ceiling negotiations.

In case you missed the report (and it would have been easy given how little coverage there was in the news), the first report of the 2nd Quarter GDP came in a 1.3% and the 1st Quarter GDP growth was revised downward from 1.9% to 0.4%. Even the most bearish forecasters did not see this coming. When you couple this with a 9.2% unemployment rate, the market reaction was predictable. I am not suggesting that the debate in Congress is not important, I think it is; however, the bond market has been signaling that all of this kabuki theater in Washington is much ado about nothing. The interest rate on the 10-year US Treasury is trading at the lowest level in 2011 which is not the behavior of investors you would expect if they were anticipating impending crisis. Compare our 10-year rate to Greece's 14.97% (as of market close on Friday); those are bonds that are priced for default.

The news early Sunday evening (July 31st) suggests that progress is being made on a debt ceiling compromise with, predictably, lots of complaining from both sides. The markets will undoubtedly respond positively upon the news on Monday, but do not lose focus on the bigger economic picture. And this is where our attention should be. The voters will decide in 2012 about how they want this country to move in the future, but investors are looking at the health of the economy and determining if companies are properly priced given their outlook.


A debt deal is likely to come forward and will continue to occupy most of the media's attention as they try to determine who won and who lost the political battle. Investors will look at the deal and decide if it is meaningful and actually cuts spending or if it is just more of same rubbish that has been the hallmark of our Washington politicians in the past quarter century. So stay focused on the gold and bond markets. They will tell you what investors think.

Gold has risen to record highs as investors worry about many governments' abilities to manage their finances. How much, if any, of a pull back in the price of gold will signal confidence in political deal making and discipline both here and abroad. US Treasuries will focus not just on the debt ceiling debate, but on the strength of the economy.

There are two key economic reports due out this coming week. On Monday is the release of the ISM Manufacturing data and Thursday is the weekly Jobless Claims report. I highlight these two reports because they reflect the degree of growth prospects for the economy.

Looking at my technical analysis, I sound much like a broken record. Small and mid-capitalization stocks are preferred over large, equal-weighted indexes over capitalization weighted. US stocks and commodities are preferred over international stocks. Bonds are not favored; however, they have delivered steady returns in what is becoming an increasingly volatile year. 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.

Within the bond category I prefer US corporates and international. Treasury Inflation Protection Notes are also favored.

Volatility has returned to the markets. After many gyrations over the past several months, we have essentially moved sideways. You may be questioning why I have consistently favored small and mid-capitalization stocks over large caps even as the DJIA has outperformed the Russell 2000 in 2011. The answer is time horizon. Over the past 12-months the Russell 2000 is up 22.5% compared to the DJIA which is up 16.0%. It will require more than a short-term move in the markets before I make a change to my guidance.

These are challenging times and I share your concerns over what is happening here and abroad; however, I firmly believe that having the proper tools to help guide you through these times is more necessary than ever.

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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