Thursday, February 16, 2012

Greece once again dominated headlines this past week as fears surfaced that the "sure thing deal" was not as much of a sure thing as investors have believed these past weeks. Additionally, the downgrade of 34 Italian banks by Standard & Poor's Friday further shook investor confidence.

All major stock indexes posted their first weekly loss in 2012. The Dow Jones Industrial Average (DJIA) fell 61 points (-0.47%) while the S&P 500 lost just over two points (-0.17%). The frequently more volatile Russell 2000 index (greater weighting of smaller company stocks) lost 2.14% and was the worst performing major index of those I follow. The technology heavy NASDAQ index was the best performing major US stock index losing just 0.06% for the week. After six trading weeks thus far in 2012, the DJIA is up 4.78%, the S&P 500 is up 6.76%, the Russell 2000 is up 9.71%, and the NASDAQ is up a strong 11.47%.

The Information Technology sector was the best performing of the eleven major economic sectors followed by Energy, Consumer Staples, and Telecom. Materials, Real Estate, and Financials were the worst with Materials and Real Estate both losing more than 2% for the week. Information Technology, Materials, Financials, and Industrials have posted double-digit gains so far this year with all sectors, except Utilities, providing positive gains.

International stocks were mixed last week with Asia/Pacific stocks and Emerging Market stocks remaining slightly positive while most other regions and sectors of the world were negative. Worries about Greece and that country's ability to deliver on demanded austerity cuts caused the greatest concerns among investors as talks between all concerned parties appear to be going down to the bitter end. For the year, the European-heavy MSCI EAFE is up 7.96% after losing just 0.29% last week while the Emerging Market sector continues to lead all other sectors both domestically and abroad.

Commodities in general were slightly negative for the week. The Dow Jones UBS Commodity Index (a broad-based commodity index) declined by 0.45% last week, but remains positive by 2.99%% for the year. Gold lost $15.00 (-0.86%) an ounce to close the week at $1725.30. Reports indicate that gold investors may have been raising cash as fears mounted about Greece, and a rising US dollar also made gold more expensive abroad hurting demand. WTI Oil and Brent both climbed last week with WTI gaining $1.01 (1.03%) per barrel while European-dominated Brent gained 2.38% per barrel. Oil prices did retreat on Friday after the International Energy Agency reduced its 2012 daily global consumption forecast by 300,000 barrels. The Organization of Oil Producing Countries (OPEC) similarly reduced its forecast as well earlier in the week. Commodity prices were also depressed by news from China that Chinese imports of commodities were down in January for the first time in seven months.

Currency fluctuations remained subdued this past week. The Euro gained $0.003 (0.23%) to close Friday at $1.319 from the previous Friday close of $1.316. The Japanese Yen gained 0.95% against the dollar. The Euro did fall a full penny on Friday's trading on the negative drumbeat of news coming from Europe about Greece.

US bonds were relatively flat again last week with the Barclays Aggregate US Bond Index gaining 0.18% for the week and is now up just 0.67% for the year. While yields of both the US 10-year and 30-year Treasuries gained last week (bond prices falling), Treasury prices jumped on Friday as investors returned to the US for safety on European worries (are you noticing a theme this week?). Mortgage-backed bonds was the best performing bond sector last week followed by US long-duration US Treasuries and High Yield, while International treasuries was the worst. For the year preferreds, municipals, treasury inflation, and emerging market debt have been the best performing bond sectors while longer duration US Treasuries has been the worst.


Scanning media outlets both here and abroad this week, I was struck by the observation that virtually every major financial headline has a reference to Greece. I also find some irony in that fact that the word tragedy is of Greek origin. Events are moving swiftly and some of what I discuss below may have changed by the time my Update is published.

Let me begin by putting the Greek debt crisis into real numbers. According to an article in Der Spiegel this week, Greek debt in 2008 totaled €263 billion. The European Central Bank (ECB) estimates that at the end of 2011 that debt had grown to €355 billion-a jump of nearly 26%. Economic output (GDP) over the same period fell 6.9% from €233 billion to €218 billion. If the ECB's numbers are correct, the current debt-to-GDP ratio in Greece stands at 163%. The €14.4 billion bond payment due on March 20th represents 6.6% of the total 2011 output of the Greek economy. Money the Greek's simply do not have. European Union (EU) leaders understand that the growth rate of Greek debt must be halted and is at the core of demands the EU, ECB, and International Monetary Fund (IMF) have sought. These three organizations are expected to make a final decision this week on whether or not Greece will receive the next round of bailout funds estimated to be €130 billion.

This past Thursday evening the Greeks and EU/ECB/IMF negotiators announced that the Greeks had accepted the terms demanded by the EU for further aid. This agreement includes severe austerity measures aimed at reducing the amount of outstanding debt to 120% of GDP by the year 2020. A second major component of achieving this reduction in debt is the 50% "voluntary" write-down of the €200 billion of debt currently held by the private sector. These discussions appear to be going well; however, there must be complete agreement no later than next Friday, February 17th, in order for all of the bond swaps to be completed by the March 20th deadline.

If the Greeks have agreed to the new austerity measures and the private sector debt restructuring talks appear to be a done deal, then why have the markets not reacted more positively? The answer is we have been here before and the Greeks have failed to deliver on their promises of spending cuts and debt reduction. This time, the EU/ECB/IMF group is demanding that the major Greek political parties all publically support the austerity measures and that the Greek parliament passes the austerity measures into law before the bailout money will be released.

Not surprisingly many Greeks are not happy about these most recent agreements and the major labor unions have called for a two-day general strike and three days of protests before the Greek parliament votes on the austerity package either late Sunday evening (February 12th) or Monday. The leadership of both major political parties in Greece have come out in favor of the austerity cuts and are urging their party members to vote for passage. At least one minor party has come out against the package and there are reports that some individual members of both parties have said they would also oppose the deal. Most experts doubt, however, that the bill will fail to pass and that Greece will receive their money just in time.

As I have commented before, all of this deal making and bailouts does not solve the true problem in Greece and that is the Greek economy is broke and there is no economic growth in the foreseeable future that will allow the Greeks to pay off their mountain of debt. The Greek economy will require a fundamental restructuring and that may take many, many years. In the meantime, the Greeks will continue to face deadlines and rioters in the streets as they find themselves repeatedly up against the wall to make bond payments with cash it does not have. It also remains to be seen whether the Germans and other Europeans have the patience to continually provide Greece money and whether the Greeks will have the patience to face a severe cut to their standard of living and fundamental changes to their economy. I have my doubts. Greek resentment has risen dramatically as evidenced by recent signs and editorial cartoons depicting references to Hitler's Third Reich, and Greek polls showing little support for the cuts. Some Germans, but not German Chancellor Merkel, are now talking openly about releasing Greek from the EU at some point and using this next loan as a way to buy time so an orderly breakup can occur.

I believe all of this uncertainty is what eats away at the markets and frightens investors. No one really knows if Greece can fix itself or if Greece will be in the EU six-months or a year from now. The EU leadership's insistence of keeping Greece in the EU stems more from a lawyer-like desire to reach an out-of-court settlement in which you know the terms of the deal versus taking your chances in front of a judge. The markets will certainly tell us how well the Europeans are doing on dealing with this crisis.

One other point-Portugal is next.


The uncertainty surrounding events in Greece is likely to continue impacting markets both here and abroad. I believe that the markets are expecting a favorable resolution in Greece and the EU even as deadlines

draw near. The lukewarm reaction to last Thursday's announcement that an agreement was reached may have indicated that the agreement had already been priced into the markets, or investors may simply be waiting for the funds to actually be transferred to Greece before anyone will begin to breathe a sigh of relief.

As investors, we must keep a close watch on Greece, however, the signs that markets have been strengthening continue. The economy shows signs that growth, albeit weak, is here to stay. The political uncertainty surrounding the upcoming elections is still months away and the Federal Reserve remains exceedingly accommodative.

The markets are overbought but not to the point that new positions cannot be taken, however, that window may be closing. Overall, the market is currently 114% overbought in relation to the past ten weeks and I consider a reading of 150% as a clear red flag. US Stocks have continued to be the strongest of the five major asset categories I follow followed by Foreign Currencies, Commodities, Bonds, and International stocks. International stocks have made the greatest improvement recently particularly the emerging market sector.

Among US stocks, mid-capitalization growth stocks remain favored from a relative strength standpoint along with equal-weighted indexes. All major economic sectors are favored with Information Technology and Real Estate posting the strongest technical scores while Consumer Discretionary and Real Estate are the strongest on a relative strength basis.

As noted, the emerging market sector continues to perform well with emphasis on the Asia/Pacific region. Thailand, Indonesia, and Malaysia are particularly strong countries from that region of the world. South African and Peru are also performing very well at this time. The volatility within the emerging market space makes investing in these regions riskier than most and should only be considered by more risk-tolerant investors.

Other than gold and precious metals, the commodity space is showing lackluster returns so far in 2012. Global demand appears to be weakening and a strengthening US dollar is providing headwinds for commodities. Individual commodities may pop based upon an important headline or event; however, across the board I see broad commodity investments as a place to trim portfolios right now. My long-term bias remains towards carbon fuels once demand picks back up or the US dollar weakens.

The bond market remains attractive and I am not changing any of my positions for this asset category. I continue to like international bonds, inflation-protection bonds, and a mix of high-yield and high-quality bonds. I am also watching senior bank loan bonds and am considering these as part of my bond portfolio recommendation. I do believe that for most bond investors income is the number one issue and this continues to be harder and harder to achieve as interest rates remain low. Bond investing has become much more difficult in recent years and I suggest investors pay particular attention to this part of their portfolios.

There are a slew of important economic reports being released this week. On Tuesday morning the Retail Sales report for January is expected to show a nice bounce on the strength of auto sales. The January Industrial Production report will be released on Wednesday morning. It is expected that industrial production will increase over December's report. Thursday will have a group of reports coming out. January Housing starts are expected to increase slightly over December's numbers while Initial Jobless Claims is anticipated to be about the same as last week, and the Producer Price Index will give investors some indication of how much inflation is showing up at the manufacturing level. Consensus expects a jump. The week finishes on Friday with the Consumer Price Index (CPI). Like the Producer Price Index (PPI), this indicator is of inflation only at the retail level. Like the PPI, the CPI is expected to jump. Collectively these reports will help investors gauge the strength of the US economy.

The news from Europe will be important next week, but so will the reports about the strength of the US economy. Stay patient and do not let your emotions get the better of you in either up or down markets.

Please note that I will be traveling on business next weekend and will not be publishing a Weekly Update for the week of February 19th.

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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