Wednesday, April 25, 2012


As the year progresses I find that I am drawn to the word muddle. A number of high profile money managers such as Bob Doll from BlackRock said that he expected the markets to muddle around in 2012. Markets that muddle meander and bump into things, they go up, they go down, they will search for some sort of direction, and will end up somewhere. I have to say that muddle pretty much sums up the past week and the year.

Last week offered some good examples of what I mean. On Monday, April 16th, March retail sales came in much stronger than expected. But then subsequent reports released during the week were less encouraging. March housing starts fell, industrial production was flat, manufacturing production dipped slightly, initial jobless claims jumped sharply for the second week in a row, and the annual rate of home sales pulled back. Ouch. However, US corporate earnings continued to come in strong and that helped offset some of the worries about the lackluster economy.


Then there are the continued fears in Europe about the Spaniards struggling to keep borrowing costs from pushing into the real danger zone, or concerns about what will happen to France if a hard-left socialist is elected next month, or the effect a slowing European economy will have on the rest of the world. The G-20 nations (representing 80% of the world's GDP) took an important step by pledging another $430 million to the International Monetary Fund (IMF) to add to the European Union's (EU) stability fund. This move is meant to placate investor fears of a Spanish debt meltdown.

So muddle onward.

All major US indexes managed to end their two-week losing streak this past week except for the NASDAQ. The Dow Jones Industrial Average (DJIA) gained nearly 180 points (1.4%) to close back above 13,000. The S&P 500 added 0.6%, and the Russell 2000 rose just under 1%. The NASDAQ lost 0.4% principally under the weight of Apple's (AAPL) loss of 5.3% last week. Apple makes up nearly 12% of the index's weighting. For the year, the DJIA is up 6.4%, the S&P 500 is up 9.6%, the Russell 2000 has added 8.5%, and the NASDAQ still leads with a gain of 15.2%.

International markets moved in unison with US markets last week. The MSCI EAFE posted a solid 1.5% gain. Of the major international sectors I follow-Asia/Pacific, the Americas, Developed, and Emerging; only the Asia/Pacific was down losing just over 0.6%. For the year, the MSCI EAFE is up just under 7%. The Emerging Market sector remains the best so far in 2012 with a gain of 12%. The other sectors are up nicely as well. Looking from a broad perspective, there has been little to differentiate US market performance from those abroad.

Commodities were a non-story. The DJ UBS Commodity Index, which represents a broad basket of various commodities, fell for the fifth consecutive week losing 0.9%. WTI oil was virtually unchanged gaining just 0.5% while gold fell 1% to close at $1642.50 per ounce. Brent Oil (primarily produced in the North Sea) posted a 2% decline on hopes that talks between the western nations and Iran that are getting underway will help diffuse the tensions in the Middle East. For the year the DJ UBS Commodity Index is down 1.8%, gold is up 4.8%, and WTI oil is up 4.5%.

Taking their cue from the stock markets, currencies were little moved. The Euro recovered about 1% to close Friday at $1.322 compared to the previous Friday close of $1.308. The US Dollar Index, a basket of foreign currencies measured against the US dollar, fell by roughly 1%. For the year, the Euro is up 2.2% and the US Dollar Index is down 1.3%. Muddling in the currency markets.

More muddling found in the bond markets. The Barclays US Aggregate Bond Index was up for the fifth consecutive week gaining just 0.1%. For the year this broad bond index is up a very modest 1.3%. US Treasury yields fell a little. The 10-year remains under 2% for the second week in a row closing at 1.959%. French 10-year yields jumped by nearly 5% to move from 2.95% of a week earlier to close Friday at 3.091%. I believe this reflects investor worries that this Sunday's first round of the presidential election will ultimately lead to a socialist victory in early May. Among the many bond sectors, municipals, emerging market sovereign debt, and high yield were among the best performing while preferreds and short-duration US Treasury and corporate debt were the weakest. For the year, preferreds, high yield, and emerging market debt are the best performing bond sectors while extended duration US Treasuries and corporates remain the weakest.

WHAT IS RELATIVE STRENGTH?

Throughout my Weekly Updates I frequently mention the term relative strength. I thought I might spend a few moments explaining this extremely important concept in some detail.

Relative strength is how strong something is in relation to something else. We see examples of relative strength all around us every day. Professional football gives us one of the most obvious ways relative strength can be explained (and one I enjoy). At the end of last year's NFL season there were eight division winners, four in the National Football Conference (NFC) and four in the American Football Conference. Looking more closely at the NFC East Division the final standings were:

New York Giants 9 wins 7 losses

Philadelphia Eagles 8 wins 8 losses

Dallas Cowboys 8 wins 8 losses

Washington Redskins 5 wins 11 losses

After 16 games of head-to-head competition within the division and throughout the NFL, the New York Giants was the strongest team within their division. The Giants along with seven other division winners and two additional wild card teams (best records of non-divisional winners) from each conference then went on to another round of head-to-


head competition and so on until a Super Bowl champion was crowned. This is relative strength. Head-to-head competition ultimately determines the winner. Go Giants!

The standings come out each week during the football season. The win-loss records and divisional standings start providing an indication as to which are the strongest teams and which are the weakest. Unfortunately for Washington Redskins fans, it became obvious early in the season that they were not a strong team and their chances of making it to the playoffs was practically nil and that was precisely the way the season ended.

This same concept can be applied to investing. Two stocks can be compared to one another, a stock can be compared to an index such as the S&P 500 to see how that stock is performing in a head-to-head completion with the index, or a stock can be compared against a sector index to evaluate performance against a peer group. Sector indexes can be compared to other sector indexes, or sector indexes can be compared to the S&P 500. The possibility of comparative analysis is virtually endless. All you need is price or index data to set up a head-to-head competition. Computers make this all possible and Dorsey Wright & Associates provides that analysis for me.

So the next time you hear me say for example, growth is favored over value on a relative strength basis, you can understand that I am referring to the head-to-head competition of one or more growth indexes compared to one or more value indexes.

Relative strength is not a perfect predictor. Just remember that the New York Giants won the Super Bowl with a 9 and 7 regular season record while the Green Bay Packers with a 15 and 1 record lost in their first playoff game to the Giants. Based strictly on relative strength the Green Bay Packers should have won the Super Bowl. However, by following the relative strength (won/loss record) analysis you would have still eliminated most teams from consideration (think Washington Redskins) and focused your efforts on the top teams to provide you the greatest opportunity to win. This is precisely what I try to do when advising my clients.

LOOKING AHEAD

The first round of the French elections will have been held by the time this Update is published. The French go to the polls on Sunday and will narrow the field to the two candidates who get the highest vote total. Polls indicate this will be current President Sarkozy and left-wing Socialist Francois Hollande. Polls also indicate that in a head-to-head election on May 6th, Mr. Hollande should defeat Sarkozy. Mr. Hollande worries investors because one of his campaign pledges is to scrap the hard-negotiated European bailout package agreed to by Sarkozy and German Prime Minister Angela Merkel. Adding this new element of uncertainty into an already difficult time could prove challenging for the EU.

The US Federal Reserve Open Market Committee (FOMC) will begin meeting Tuesday and the Fed's guidance will be released Wednesday at 2 PM followed by Mr. Bernanke's comments at 2:15 PM. The markets will likely focus closely on Mr. Bernanke's views of the economy and the possibility of another round of quantitative easing. He is also expected to provide confirmation of his commitment to holding interest rates low through 2014.

One third of the S&P 500 companies will release earnings this week. Apple is the most noteworthy company announcing (Tuesday) as well Intel and Johnson & Johnson. So far most companies are meeting or exceeding earnings estimates and that bouyed the market last week.

A number of important economic releases will come again this week. New Housing Starts, the Consumer Confidence Survey, Durable Goods Orders, the FOMC announcement, Initial Jobless Claims, and the initial estimate of the 1st Quarter, 2012, US Gross Domestic Product (GDP) on Friday. All of these reports are important and as has been the case recently, expected to show slightly modest growth. The consensus for the GDP is expected to fall from 3.0% to 2.5%.

For now, my views about the markets developed through the Dorsey Wright & Associates (DWA) relative strength analysis is unchanged. US stocks remains the strongest asset category followed by Commodities, Bonds, International stocks, and Currencies. US stocks retain a very sizable lead over the other categories with the others clustered closely together. Mid-capitalization stocks are favored, growth is favored over value, and equal-weighted indexes are favored over capitalization-weighted ones. On a relative strength basis, DWA puts Consumer Discretionary, Information Technology, and Financials as the three strongest economic sectors. The New York Stock Exchange Bullish Percent fell again slightly last week and remains in a negative trend. However, with a reading of 67.3%, the overall strength in stocks remains even though this important indicator is signaling caution.

On a personal note, I would like to take a moment and recognize my son Patrick's selection as one of the 24 Golden Pencil collegiate award winners recognized by The One Club in New York City for outstanding achievement in Advertising, Design, and Interactive. The competition featured submissions by undergraduate and graduate students from the top advertising and art schools here in the United States as well as around the world. I will be joining my son to receive his award in New York City on May 9th. Congratulations Pat for a job well done!

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 financial events and situations.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, including international economic, political and regulatory developments.

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.

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.

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.

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.

Sincerely,








Paul Merritt, MBA, AIF ®, CRPC ®
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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