Wednesday, February 8, 2012

With Europe's leaders reaching an important agreement regarding greater fiscal union and Greece's debt restructuring talks dragging on, investors turned their attentions to the better than expected jobs data here at home and pushed stocks higher both here and abroad.

The Dow Jones Industrial Average (DJIA) gained 202 points (1.59%) bringing the yearly gain of this key index to 5.28%. The S&P 500 also pushed up strongly adding 2.17% for the week and is now up 6.94% for the year. The Russell 2000 (smaller capitalization stocks) leads all US indices for 2012 having gained 12.17% as investor appetite for risk continues.

Financials, Information Technology, and Telecom were the best performing sectors last week with seven of the eleven major economic sectors outperforming the DJIA. Last year's leaders continue to lag with Utilities, Consumer Staples, and Energy ranking as the bottom three performers for the week. The good news was that all sectors did turn in a positive performance for the week. For the year Materials, Financials, Information Technology, and Industrials are leading with double-digit returns. Utilities, Consumer Staples, and Telecom are the bottom three performers with Utilities the only sector with a negative return so far in 2012.

The rally in International stocks continued as worries over an immediate meltdown in Europe subside. The MSCI (EAFE) gained 2.27% for the week and is us 8.28% for the year. The European Union (EU) summit held the first part of the week resulted in 25 of 27 EU countries (Britain and the Czech Republic the two exceptions) signing a Germany-led proposal to increase fiscal union. Although Greece has yet to reach agreements regarding restructuring their debt with private bondholders and getting a commitment for additional funding from the EU, talks are progressing. Emerging Market stocks continue to lead all major stock categories with an increase last week of 3.16%. This international sector is up 15.76% for the year.

Commodities were generally flat for the week. The Dow Jones UBS Commodity Index (a broad-based commodity index) declined by nearly three-quarters of a percent last week but is up 3.46% for the year. Gold gained $4.90 (0.28%) an ounce to close the week at $1740.30. For the year, gold has gained 11.07%. Base metals (copper, tin, lead, etc.) have also gained nicely for the year and are up over 13% as a group. WTI Oil lost $1.72 (-1.73%) a barrel for the week but did rally 1.5% Friday on the strong jobs report. The performance of base metals and oil is tied closely to investor sentiments about future economic growth and currency movement while gold is considered by soma as a safe-haven play.

Currencies were relatively unchanged for the week. The Euro lost 0.45% to close Friday at $1.316 from the previous Friday's close of $1.322. The Japanese Yen also lost a modest 0.20% against the dollar. The Indian Rupee, the Mexican Peso, and the Brazilian Real are the best performing currencies in 2012 so far after posting nice gains last week.

US bonds were flat last week with the Barclays Aggregate US Bond Index losing 0.06% for the week and is now up just 0.48% for the year. International bonds again led all bond sectors last week while US Treasuries lagged all sectors. The US 30-year Treasury yield closed Friday at 3.12% up slightly from the week before and for the year has increased from 2011's close of 2.89%. US Treasuries continue to be a so far safe-haven investment and as investors' appetite for risk increases, I believe US Treasuries are likely to sell off and interest rates rise.

US JOBS GROWTH AND EUROPEAN PROGRESS

The US unemployment rate unexpectedly fell to 8.3% as net jobs increased by 243,000 in January according to the Department of Commerce. The increase was solid and across the board pushing stock markets nicely higher on Friday and pushing up interest rates as investors sold bonds to buy stocks. The only negative headline from the report continues to be the drop in the participation rate, which measures the total size of the US workforce. This number fell by 1.2 million people to its lowest rate since 1983. All in all this was an excellent report.

The news from Europe was also encouraging. EU leaders agreed to greater fiscal unity meaning that if a country violates certain parameters set regarding debt ratios, the violating country will immediately be referred to the European Court of Justice and may face sanctions. This progress was overshadowed, however, by a German miss-step when the German Finance Minister suggested that Greece should turn over part of its fiscal sovereignty to an EU watchdog to make sure the country adheres to strong austerity cuts. The Greeks screamed in protest and most of the other EU leaders voiced their support of Greece. So it does appear that there is clearly a limit to how much sovereignty EU countries are willing to cede to the EU and this in turn will, in my opinion, continue to cause on-going conflict among profligate members and the rest of the EU. The agreement reached in Brussels last week must now be voted on by each of the member nation parliaments and early signs are that there may well be opposition organized by the extremely influential public service unions found within most EU countries.

Greece continues to negotiate two separate deals. First, the country is negotiating with the private bondholders for a restructuring of the debt these investors hold. Most reports indicate that a successful outcome is near. Second, Greece is negotiating with the EU, the International Monetary Fund (IMF), and the European Central Bank (ECB) for another installment of lending from the European bailout fund. These negotiations are not going as well and face a hard deadline prior to the March 20th repayment of €14.4 billion ($18.9 billion) in bonds coming due. The Greeks do not have the funds to make the payment, and if agreement is not reached, Greece will be the first EU country to default on its debt. The Europeans, especially the Germans, are very concerned that without greater commitments of austerity from the Greeks, they will never repay their loans and they do not want to throw good money after bad. The Portuguese and their bondholders are watching Greece carefully because the terms of success or failure will likely be applied to that country next.

Good news in general last week, but important decisions this week may signal the longer-term success or failure in the European region.

LOOKING AHEAD

The markets have moved into an over-bought status resulting from the gains so far in 2012. This means that new positions must be evaluated carefully before purchases made. I believe the most over-bought sectors in the market today are high-yield bonds, emerging market bonds, municipal bonds, and real estate. Individual investments must also be carefully evaluated before buying because the risk-reward relationship may not favor the investment currently, and buying on a pullback may be a better option.

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. Mid-capitalization growth stocks remain favored from a relative strength standpoint among US stocks, while major US economic sector has moved into a favored status.

The strengthening trend in the Emerging Market sector suggests that investment here may be warranted for more aggressive investors. Keep in mind that the International Stock asset category is still in last place, but has been showing significant improvement.

Gold and precious metals have regained their top position among commodities. The negative trend in Commodities in general has prompted me to consider reductions in commodity positions, except for precious metals, but I am not generally in favor of eliminating all commodities from your portfolio if you already own positions. Positions in base metals may also be considered at this time.

The bond market remains attractive and I am not currently considering changing any of my investments 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. The Federal Reserve's announcement that they intend to purchase more long maturity bonds may help to shore up the long end of the yield curve, so be alert. I typically favor the short and intermediate maturity bonds because they potentially have less volatility to interest rate moves.

The coming week has only two significant economic reports due out--the regular Thursday Initial Jobless Claims and Friday's report on the International Trade Balance. Consensus calls for first time jobless claims to increase by 3000 to 370,000 for the week. This number remains important as current evidence regarding the state of unemployment within the country.

I was pleased by last week's markets and the overall trend in markets so far in 2012. I want to remind readers that the markets move up and down and I believe that there will be attractive buying opportunities when markets make their likely pullbacks. Patience is imperative for good investing.

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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