Wednesday, November 23, 2011

Markets around the world remained in limbo this past week as politicians pontificated and postured. Yet with all of the seemingly determined efforts, investors see governments no better off and making little effort to seriously deal with the problems facing them. Only reluctant and minimal intervention by the European Central Bank to purchase European sovereign debt kept the situation in Europe from coming completely unglued.

The third trading week in November saw the Dow Jones Industrial Average (DJIA) give back 358 points (-2.94%) with three negative sessions out of five. The S&P 500 lost 3.81% and the Russell 2000 dropped 3.39%. For the month the DJIA is down 1.33%, the S&P 500 is off 3.00%, and the Russell 2000 is down 2.92%. With only six weeks left in 2011, the DJIA is up 1.89% for the year. The S&P 500 is down 3.34% and the Russell 2000 is off 8.20% for 2011.

All eleven major US economic sectors were negative for the week. Consumer Discretionary and Utilities were the top two performing sectors and managed to beat the DJIA. Financials, Energy, and Health Care were the bottom three sectors. For the year, Utilities, Consumer Discretionary, and Health Care are the top three sectors and are all ahead of the DJIA. The bottom three sectors are Financials, Materials, and Telecom. As noted in previous Updates, Financials is the worst performing sector by a wide margin reflecting investor concerns about uncertain exposure to the European debt crisis and the mortgage-debt overhang on bank balance sheets.

For the week, international stocks, as measured by the MSCI EAFE index, managed to outperform the US by losing just 1.64%. However, for the month, the MSCI EAFE is off 6.94% and for the year, it is down 15.55% significantly underperforming US markets. This brings me to another point. As of market close last Friday, the US is out-performing most of the world. Markets are down all around the globe. Russia is off 14%, China is down nearly 20%, India is down 32%, and Brazil is off 22%. Each of these countries may have its own explanation for such a poor year, but in total, we are seeing a tough investment environment everywhere.

The Euro weakened compared to the US dollar for the third consecutive week falling over 2 cents to close Friday at $1.352. Again, the story is the same. Fears over European debt has pushed investors to the US.

Commodity markets have become mixed and uncertain. In a week where US economic data was a little less bad than expected and the Conference Board's Index of Leading Economic Indicators posted a stronger than anticipated 0.9% gain for October, conventional wisdom says commodity prices should have moved upwards on future demand expectations, but just the opposite occurred. The Dow Jones UBS Commodity Index, a broad basket of commodities, fell 2.71% for the week. Gold lost $59.70 per ounce (-3.34%) and WTI Oil lost $1.81 (1.81%) per barrel. Lead and livestock were among just a handful of commodities to post gains.

Bond markets were little changed. Extended duration US Treasuries was the best performing sector while High Yield and Inflation Protection notes were the worse. All bond sectors out-performed the broad equity markets. The 10-year US Treasury yield fell last week to close at 2.003% compared to the previous week's close of 2.052%. The Barclay's Aggregate U.S. Bond Index closed Friday up 0.01% for the month and is now up 7.37% for the year.


As I reviewed the many news reports of the previous week in preparation of this week' Update, I was struck by how little had changed in context or tone from earlier weeks. I am not suggesting that the political class is not working hard to stay ahead of the various problems confronting their countries, but I am saying that they are making no progress.

Interest rates in Italy pushed above7% for their 10-year treasuries until the European Central Bank(ECB) stepped in and brought rates down to 6.64% through open market bond purchases. As of the end of May, the ECB had bought €75 billion ($101.4 billion) of European sovereign debt, as of the end of October that number has jumped to €173.5 billion ($234.6 billion). These purchases have given politicians more time to achieve some kind of effective and meaningful structural reforms in dealing with the debt crisis. I am not sure, however, that any meaningful reforms have actually been achieved. To buy even more time, a louder chorus of voices is asking the ECB to greatly expand their bond purchases. The ECB has fought off efforts to expand its role since the treaty organizing the ECB does not allow for this type of activity. No agreement or solution appears imminent.

Here in the US the Super Committee has failed to reach an agreement in meeting its mandate to cut $1.2 trillion from the US deficit over the next 10 years. Unless there are some late night heroics, I am extremely doubtful that an agreement will be reached and the automatic cuts will be implemented beginning in 2013. In the meantime, the US debt crossed over the $15 trillion mark and this country adds $4 billion in new debt every day! The markets will no doubt see our government as fundamentally unable to govern itself responsibly.

So another week has gone by, and there is nothing new to report. The markets remain range-bound and surge or fall on the slightest innuendo or rumor. At least here in the US, the formal deadline of the Super Committee of November 23rd will force an outcome, but failure to achieve any deal at all will leave the markets with little confidence that our government has the ability to govern itself responsibly.


The momentum in the US markets has shifted from demand to supply. Put another way, sellers are currently in control. The New York Stock Exchange Bullish percent (NYSEBP) has slipped into a column of O's and presently has a value of 55.16. This "middle of the field" position matches the 10-week distribution of prices which suggest that the market in general is fairly priced, neither over-bought or over-sold. A move by the S&P 500 below 1190 would be problematic and represent a violation of near-term support.

There has been no change in any of the major technical indicators that I follow other than the NYSEBP reversing back into a column of O's (supply in demand). Markets are range bound and investors are reacting daily to the latest headlines coming out of Europe or Washington. Spain appears to be in the process of replacing the Socialist Party with a more conservative one marking the third major leadership change recently in the European Union.

Among the major asset categories I follow, US stocks remains first. Commodities and Currencies are at a virtual tie at second and third, Bonds are fourth, Cash fifth, and International Stocks is last.

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 anticipate that volatility will continue during these uncertain times.

I continue to like gold and commodities in general. Gold for uncertainty and commodities as an inflation hedge. On a relative strength basis, Agriculture and Broad Basket commodity categories are favored.

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

This coming week will be shortened due to the Thanksgiving holiday. All weekly key economic reports will be released by the late Wednesday. On Monday Existing Home Sales will be announced at 10 AM EST; Tuesday will see the most important report with the first revision to the 3rd Quarter GDP figure; and Wednesday is set for Initial Jobless claims, Durable Goods Orders, Consumer Sentiment survey, and Personal Income and Outlays.

Traditionally trading volumes will decrease as the week progresses. This does not mean that wide swings will not occur, but on smaller and smaller volume, these moves do not have the same significance as they would on more typical trading days.

I want to wish everyone a very Happy Thanksgiving. I sincerely hope that each of you have the opportunity to share the holiday with your families and friends and that each of us take a moment to remember how much we all have to be thankful for in these turbulent times. Please take a moment to think of our soldiers, sailors, marines, and airmen around the world who cannot be home with their families so we may enjoy the special liberties their sacrifices afford us. May God Bless them.

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.


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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