Wednesday, March 28, 2012

Most major stock indices posted their year-worst weekly returns for 2012 on generally blah economic reports. Here in the US, new home sales for February fell a disappointing 1.6% from January to a seasonally adjusted rate of 313,000 units annually. Also troublesome was news that Chinese manufacturing and its broader economy were slowing. The week reminded
investors that economic recoveries, especially weak recoveries, are anything but a smooth ride to higher stock values.

For the week, the Dow Jones Industrial Average (DJIA) lost 152 points (-1.15%), the S&P 500 fell 7 points (-0.50%), and the Russell 2000 was flat losing just 0.02% for the week. The tech-heavy NASDAQ index was a notable exception gaining 0.41% for the week lifting this index to a 17.76% gain for 2012. By comparison, the DJIA is up 7.06% for the year, the S&P 500 is up 11.09%, and the Russell 2000 is up 12.03% so far in 2012. After 12 weeks of trading in 2012 the NASDAQ has only one down week (week 6, -0.06%), the DJIA has five down weeks, the S&P 500 only two, and the Russell 2000 has four.

Three major economic sectors posted gains last week: Consumer Discretionary, Consumer Staples, and Information Technology. Financials were flat, while Energy, Industrials, and Materials were the bottom three performers. For the year, the top performers continue to be Information Technology, Financials and Consumer Discretionary. Utilities, Consumer Staples, and Energy are the bottom three with only Utilities in negative territory down a little more than 3%.

International stocks continued their recent struggle especially the Asian/Pacific region and Emerging Markets. The broad, European-centric MSCI EAFE index fell 1.53% for the week while the Asia/Pacific region posted a 1.21% decline and Emerging Markets in general lost 2.57%. The Emerging Market sector within the international category remains up a strong 13.68% for the year despite being down over 4% so far in March. News of economic contraction in China is driving the pullback in that important sector and region of the world.

The Dow Jones UBS Commodity index posted a decline of 1.48% matching most equity indexes for the worst weekly performance in 2012. Gold managed a small improvement adding $6.60 (0.40%) to the price of an ounce of gold closing Friday at $1662.40. Analysts generally attributed the slight rise in gold prices to a declining US dollar and falling interest rates. WTI Oil fell slightly (-0.18%) to close the week at $106.87 masking a sharp run-up on Friday as news entered the market that Iranian oil exports have fallen recently. This news offset the general downward pressure on oil prices caused by a weakening US dollar and indicates that the fear-factor of an unstable Middle East is keeping oil prices extended. Cotton and Cocoa were the best performing commodities that I track while the highly volatile Natural Gas sector fell over 20% for the week. Other poorly performing commodity sectors last week include base metals (i.e. lead, tin, and nickel) and platinum. For the year, Natural Gas, Gasoline, and Platinum are the best performing commodity sectors while Coffee, Cotton, and Livestock are the worst.

The US dollar continued to lose ground last week falling a penny (-0.76%) against the Euro and the US Dollar Index fell 0.55% for the week. The drop can be attributed to the generally lackluster economic data from the housing market last week raising doubts about the overall strength of the US economy and recovery. Currencies in general have been a fairly subdued asset category for the year with the Euro up 2.55% and the Yen up 7.03% against the US dollar.

Bond markets were flat for the week with the Barclays Aggregate US Bond Index up just 0.1% for the week. US 10-year and 30-year Treasury yields fell for the first time in four weeks giving a boost to longer-duration bonds. The 10-year Treasury closed Friday at 2.234% down from the previous week’s close of 2.294%. German and French 10-year treasuries also fell for the week while Spanish and Italian 10-year debt jumped sharply. I believe the yield movements coming in from the key sovereigns around the world is troublesome. Drops in yields generally indicate a lack of confidence in economic growth while sudden jumps like those seen in Italy and Spain show a general worry about confidence in those countries. These trends must be followed closely. For the year preferreds, international inflation, and high-yield have been the best performing bond sectors while extended US Treasuries and corporate bonds have been the weakest.

FOLLOW ON TO LAST WEEK’S OBSERVATIONS

Last week I reviewed some general observations from the experts from First Trust Advisors and their generally bullish outlook on the US economy. I share their views that America is and will remain the leader of the world economically. I also believe that the business of America is business and that the more Americans are allowed to go about their daily lives unfettered by excessive interference the greater our success will be. That does not mean forsaking those less fortunate and unable to help themselves, we must strive to help those people—but we cannot shut down the economic engine that has made this country the greatest to ever exist in the history of the human race.

I have given much thought about the economic/jobs transition taking place in the US and abroad. The world is dramatically different then it was even a few decades ago. Technology has drawn all economies closer together and advanced transportation systems allow goods to travel freely around the world. Industries such as steel and agricultural production, which were once focused wholly on domestic consumption, are now international in scope. Capital investment has been able to seek out its most productive use. Looking at statistics from the Bureau of Labor Statistics and the United Nations, the average US worker is 3 times more productive than he was in 1972, and the US leads all other nations in industrial output. In 2009 the US manufacturing output was equivalent to the output of the 3rd through 17th ranked countries combined! (Source: United Nations, “The Demise of American’s Manufacturing Sector Has Been Greatly Exaggerated,” by Mark Perry, the EnterpriseBlog, January 20, 2011). The jobs market today looks dramatically different from the jobs market of the 1960’s or 1970’s, and education is becoming a critical asset for American workers using the most sophisticated manufacturing processes here at home.

My belief is the employment challenges facing our government leaders may be tougher than they realize. Transitions are never easy and frequently unrecognized until well into the process. The days of a semi-educated worker finding a well paying job to support a family are becoming fewer and fewer. A premium will be paid for those workers who can handle sophisticated manufacturing techniques and those who cannot will be pushed further to the economic edge of society. The government must focus more

of its efforts and resources towards the effective education of Americans—especially to the very young, so every American can find meaningful and well-paying jobs. This is the challenge facing all of us, but one I believe we can meet. America will continue to be the most productive and innovative country in the world.

Speaking of transitions, I would like to take a brief moment to recognize a good friend, Capt. Alan Oshirak, of the United States Navy who retired this past Friday following 30 years of truly exceptional service to our great Nation. Alan and his family have carried the burden of sacrifice that is associated with a soldier and sailor’s life—frequent separations, extremely hazardous duties, and an unknown future--with great strength and humility. I want to publically thank Alan for his service and wish him continued success going forward.

LOOKING AHEAD

The past week showed that the US economy is still on some shaky ground. The US housing market is not as strong as hoped and is holding back parts of the economy. The employment numbers are improving but not in the quantity that would indicated a strong, sustained, and improving recovery. However, the data is still ok and growth is still occurring. I remain concerned about high oil prices and the effect these prices will have on the average family. Additionally, I am watching interest rates, both here and abroad, very closely. I think interest rates are an important indicator to how investors view the markets today and tomorrow. There have been no major changes to the relative strength analysis from Dorsey Wright (DWA). US stocks remains the strongest asset category followed by Commodities, Bonds, International stocks, and Currencies. US stocks retain a very sizeable lead over the other categories with the others clustered closely together. The International stocks category remains the most improved by overall score change so far in 2012.

Within the US stock category, DWA analysis ranks mid-capitalization stocks above large and small capitalization stocks. Growth stocks are favored over value stocks, and equal-weighted indexes are favored over capitalization-weighted indexes by DWA. I believe that it is important to pay attention to the major economic sectors when investing. DWA currently ranks the sectors on a relative strength basis as follows (starting with the strongest): Consumer Discretionary, Information Technology, Financials, Real Estate, Health, Energy, Consumer Staples, Materials, Industrials, Telecom, and Utilities. Investors seeking higher dividend income generally own the Utilities and Telecom sectors and these sectors are currently providing that income.

Within the Commodity asset category, Energy and Precious Metals are the favored sectors. The current weakness of gold and silver may cause a change in this current ranking; however, it is too early to tell. Treasuries and International Inflation Protection Notes are the favored sectors within the bond category; however, I believe the recent rise in interest rates is likely to challenge the relative strength leadership of Treasuries going forward. In terms of performance, preferreds, high-yield, and floating-rate bonds have been leading many other bond sectors as investors appear willing to take on more risk in order to get more yield. Rising interest rates must be watched carefully because bond values will fall correspondingly. The newly promoted International stock asset category places the Developed Market sector on top with emphasis on the US. Outside of the US, the Emerging Market sector has shown the best performance in 2012. Finally, within the Currency category, DWA places the Australian dollar, the Brazilian Real, and the South African Rand as the top relative strength currencies.

Economic reports being released this week will cover a variety of data points. The highlights include Consumer Confidence on Tuesday, Durable Goods Orders on Wednesday, the final revision of the 4th Quarter, 2011 Gross Domestic Product on Thursday along with initial jobless claims, and Personal Income and Outlays on Friday. A review of consensus expectations of the data shows expectations to be relatively flat for most of the data--no expected surprises on the upside or downside. The one exception is with the data due to be released on Friday covering personal income and spending. Both income and spending is expected to rally strongly for February and is an important barometer of sustained economic growth.

Sincerely,

Paul L. Merritt, MBA, AIF®, CRPC® Principal NTrust Wealth Management

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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.

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 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. 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.

TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

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 generally are 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 financial 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.

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 and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index. The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise 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 Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US. The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues. It has a heavy bias towards technology and growth stocks.