Thursday, November 17, 2011

Equity and bond markets around the world have seen a spike in volatility as investors watched the Greek and Italian governments change leadership and attempt to keep the debt crisis in their countries from spinning completely out of control.

Nine trading days into November, the Dow Jones Industrial Average (DJIA) is up 1.7%, but the road to this small gain has been full of twists and turns as the average daily DJIA change from the previous close was 188 points. Seven of nine trading days saw gains or losses of more than 100 points and six of nine days saw gains, not losses. However, the average gain was 158 points while the average loss was 249 points. Looking at the other major US indexes, the S&P 500 is up 0.84% for November and the Russell 2000 is up 0.48%. For the year, the DJIA is up 4.98%, the S&P 500 is up 0.49%, and the Russell 2000 remains down 4.98%.

Performance of the major economic sectors continues to reflect the "muddling" aspect of the overall US economy. So far in November, Energy, Materials, and Utilities are the best performing sectors, but they were only moderately better than the bottom performers, which were Financials, Real Estate, and Consumer Discretionary. For the year, Utilities, Consumer Staples, and Health Care are the top three performing sectors while Financials, Materials, and Industrials are the bottom three. The Financial sector is nearly 10% worse in performance than the Materials sector and nearly 30% worse than the top performing Utilities sector. However, the difference in performance of the other sectors within the economy is not nearly as pronounced providing little gain by favoring most sectors over another.

Europe continues to struggle with the debt crisis and although some relief emerged late in the week, the MSCI EAFE is down 5.40% for November and down 14.14% for the year.

The Euro continued to pullback against the US dollar losing another one cent in November closing Friday at $1.375. The Euro has been a barometer of investor confidence in the European Union's efforts to deal with the debt crisis. As Greece and Italy pushed through austerity measures in their respective parliaments late this past week, the Euro strengthened relative to the US dollar.

Oil has led all commodities in November as the price of a barrel of West Texas Intermediate has gained $6.03 (6.47%) to close Friday at $99.33. As supplies drop and expectations that the global economy has not stalled completely, oil has managed to rebound nicely. Gold maintains its lead for the year with the price per ounce now up $365.10 (25.72%). On Friday, gold closed at $1784.80 as investors continue to seek security in this metal. Investors looking for safety are also opting to gold at the expense of the other traditional safe-haven investment, US Treasuries, because Treasury yields are at historical lows. The UBS Dow Jones Commodity Index, representing a broad basket of commodities, is down 0.37% for November and is down 8.29% for the year.

Bond markets have shown little change in November with all bond sectors generally within 1% on the upside and -1.5% on the downside. Extended duration US Treasuries posted slight gains to lead most bond sectors thus far in November while high yield and quality corporate bonds were the weakest. The 10-year US Treasury yield has fallen in the first two weeks of the month to close at 2.052% Friday compared to the 2.122% close on October 31st. The Barclay's Aggregate U.S. Bond Index closed Friday up 0.11% for the month and is now up 6.90% for the year.

A PEPTO-BISMOL WORLD

If the news cycle looked like a menu at your favorite restaurant it would feature such wonderful international dishes like gyros, moussaka, gnocci, ossobuco, and even a little coq au vin thrown in for good measure. I must confess that I love to eat the native dishes of Greece, Italy, and France individually and in moderation but not all together or at one sitting. Too much of a good thing can cause some serious indigestion. Not every day, not after every meal, but when you do get an upset stomach, it is definitely unpleasant experience. That's when I grab the Pepto to settle things down.

Investors have suffered from periodic bouts of indigestion recently as they attempt to digest the unending stream of news coming from all over Europe. The news has certainly been spicy. Governments collapsing, riots in the street, rumors that Greece may exit the Euro, and the Italian bond market failing have all been in the headlines recently. The change of government leadership in Greece and Italy has proven to soothe unsettled stomachs in investors for now, but for how long?

I will continue to reiterate what I have been saying for some time and that is the Europeans must find a way to reform the impediments to growth within the EU, especially Greece, Italy, Portugal, and Spain. The austerity budgets recently passed in Greece and Italy are clearly a step in the right direction and investors are correct to applaud these steps. But eventually, real growth must return to Europe. If the Europeans are unable or unwilling to fix themselves, the markets (particularly the bond markets) will force reform and in the end, you may well see increasing fiscal unification or look for a number of countries withdraw from the EU and the Euro. Either way it will be an unpleasant process, but the outcome will ultimately be better for everyone.

In the meantime, keep your bottle of Pepto handy.

LOOKING AHEAD

Although Europe will certainly be in the headlines next week, look for a lot of investor attention to shift to Washington, DC, and the so-called Super Committee. The Super Committee's deadline is Wednesday, November 23rd, and any agreement/compromise will be well received if such

agreements are substantive and bi-partisan. Failure to reach any agreement will leave investors disappointed and I will look to the bond markets to see just how serious the lack of compromise could potentially become. If the US Treasury interest rates rise sharply the bond markets will be sending the same signal that they have sent to Greece and Italy-you must get your fiscal house in order before we will lend you more money to fund your deficits. Clearly, the United States is not Greece or Spain today. We can, for example print money to pay our bills (the consequence of this is inflation), but the US must address the impediments to growth otherwise the outcome will essentially be the same as we have seen in Europe, only further out in the future.

I am also watching the geopolitical issues between Israel and Iran. The European debt crisis has dominated the headlines, but follow the stories coming from Iran and remain aware.

US stocks and Currencies are the top two rated major asset categories. Both pass the cash bogey check indicating current strength in both of these major asset categories. The Australian Dollar and Yen are currently favored on a relative strength basis. I generally hesitate buying currencies because of the volatility and the ability of governments to intervene and skew the economics of the trade. The Commodity major asset category is ranked third followed by Fixed Income, Cash, and finally International stocks.

Within US equities, mid capitalization growth stocks are the strongest on a relative strength basis. Equal-weighted indexes are preferred over capitalization-weighted indexes. I believe that high quality; large capitalization dividend paying stocks present a compelling story and appear to be showing strength as a defensive investment. Within sectors, Utilities and Consumer Staples are showing the best relative strength.

I continue to like gold and commodities in general. Gold for uncertainty and commodities as an inflation hedge.

Within the bond asset category, International Bonds and Inflation Protected Bonds remain favored.

There are a series of important economic reports scheduled for release this week. The Producer Price Index, Retail Sales, and the Empire Manufacturing Index will be out Tuesday morning before the markets open. Wednesday morning is the Consumer Price Index and Industrial Production report. Thursday morning is the Initial Jobless Claims report, Housing Starts, and the Philadelphia Fed Survey. Friday is the Conference Board's report on Leading Economic Indicators. As has been the case for some time now, there is little expectation that any of the numbers will be anything but a confirmation that the US economy is in a period of "muddled growth."

Several weeks ago, I suggested that patience would be an important attribute during these volatile times. I continue to stand by that view. US stocks have shown strength since early October and they continue to do so. The volatility of the markets will remain but that should not deter your willingness to own US stocks. I am not suggesting full investment into stocks right now, but I am moving back in selectively and patiently. I am not buying any international stocks at present but do like US stocks that have broad international reach.

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.

Currencies and futures generallyare volatile and are not suitable for all investors. Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors' expectations concerning interest rates, currency exchange rates and global or regional political, economic or fi nancial events and situations.

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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