Wednesday, April 4, 2012

US and global stock markets posted excellent returns for the first quarter of 2012 ending March 30th. The Dow Jones Industrial Average (DJIA) added 995 points (8.14%) since the beginning of the year, the S&P 500 added 12.0%, the mid, and smaller capitalization weighted Russell 2000 gained 12.1%, and the tech-heavy NASDAQ was up a strong 18.7%. European markets also posted solid gains with the European-heavy MSCI EAFE up 10.0%. Within the international sector, emerging markets led all international sectors with gains so far of 13.7%. Commodities and bonds have underperformed so far in 2012 as the global economic outlook remains uncertain and as bond holders trim holdings, especially long-duration bonds, and shifting into stocks.

For the week, the DJIA gained 131 points (1.00%), the S&P 500 added 11 points (0.81%), and the Russell 2000 was once again flat adding just 0.03% for the week. The NASDAQ continued its positive ways adding another 0.77% for the week. US markets shrugged off a discouraging report indicating that home prices had continued to fall taking encouragement by the slowing pace of decline. Additionally, other housing data suggested that the housing market may be finding a bottom, and a report on consumer spending released on Friday boosted markets because it showed consumers were spending at the highest rate in seven months.

Health Care, Real Estate, and Consumer Staples led the eleven major economic sectors I follow. Only Telecom and Energy were negative for the week. For the quarter, Information Technology, Financials, and Consumer Discretionary were the best performing sectors notching gains greater than 16%. Materials, Industrials, and Health Care also notched double-digit growth. Utilities, Energy and Telecom were the bottom three. Utilities remains, as it has for most of the year, the only sector with a negative return. When dividends are factored in, the Utilities sector is down less than 2% for the quarter.

International stocks were generally flat last week. The MSCI EAFE was down 0.21% while the Americas sector led all other international sectors gaining 0.52%. Emerging markets gave back 4% of its 2012 gain in March putting a negative tone to what has otherwise been an outstanding start to the year.

The Dow Jones UBS Commodity index posted a second consecutive weekly decline giving back another 1.50% for the week. This broad commodity index is now down three of the past four weeks. WTI Oil lost $3.67 (-3.43%) per barrel to close Friday at $103.2. For the quarter, WTI Oil gained 4.4% but remains well below the weekly close of $109.62 on February 24th. The price of oil has been strongly influenced by the tensions in the Middle East with Iran, the fluctuations in the US dollar, and the global economic outlook. Gold posted its second weekly gain adding another $9.50 (0.57%) per ounce closing at $1671.9. Gold investors are watching European leaders and their most recent agreement to increase the size of the European bailout fund (more commitment equals the need for more Euros), as well as the US Federal Reserve for any indications that the Fed will come forth with another round of quantitative easing. In short, the more governments print money, the more I believe investors will push the price of gold higher. Among the specific commodity sectors I follow, cotton, coffee, and tin were the best performing sectors last week while natural gas, energy, and oil were the worst last week. For the year, tin and gasoline are the best performing sectors with natural gas, energy, and livestock the worst.

The Euro continued to gain slightly against the US dollar adding less than a penny to close Friday at $1.333. The US Dollar Index, a basket of foreign currencies measured against the US dollar also fell slightly losing 0.43% for the week. The Euro is now up 3.01% for the year while the US dollar index is down 1.46%. I believe the general lack of direction in the currency markets reflects the lack of consensus among investors about the true direction of not only the US economy, but most other national economies as well.

Bond markets have been very stable during the first quarter and this past week was more of the same. The Barclays US Aggregate Bond Index was up 0.27% for the week, down 0.58% for the month, and is up 0.33% for the year. Drifting along would be a more apt description. The notable exception would be the extended duration US Treasury sector which has seen a sell-off so far in 2012. Interest rates on the 30-year have moved from 3.014% to 3.341%. A jump of about one-half of one percent in the yield may not sound like much, but represents a 15.7% increase in the yield and has driven the price of 30-year Treasuries downward. The US 10-year has seen an even larger percentage change in yield with an 18.3% uptick from 1.871% to Friday's close of 2.214%. It is also notable that 13% of the year's gain in the 10-year Treasury yield came in just one week reminding us that interest rates can move decisively at times. The gainers for the quarter have been preferreds, high-yield, and emerging market bonds.

SO WHAT ABOUT NEXT QUARTER?

Going into the second quarter of 2012, stocks have rallied, Europe remains a mess, the US economy looks like a toddler riding a bike with training wheels, bond and currency traders are an uncertain lot, China is slowing down, and the world remains a dangerous place. So what else is new?

I am drawn back to my January 22, 2012, Weekly Update where I discussed the "Certainty of Uncertainty." I said then "Today is no different from yesterday. Yesterday is no different from last year, and last year no different from last century," but that "the uncertainty is the same." My view remains in place. We are always dealing with challenging times and we must be diligent and focused on the opportunities and risk that we see today and into the near future within the context of our individual situations and risk tolerance.

As most of you know, I rarely make predictions. Predictions are an exercise of futility over the long run. No one pundit ever gets it right on a regular basis. There is no shame in that because it is simply impossible to predict the future. Barron's magazine published an article July 29, 1991, which simply stated, "The future course of prices or market returns is...unknowable, for it is subject to the arrival of new, unpredictable information." I think we all understand this on a most intuitive, fundamental basis, and acknowledging this fact is the main reason I use Dorsey Wright & Associates (DWA). DWA gives me the tools I need to help analyze what the markets are actually doing. So, no predictions about the rest of the year, but here are the things I am going to be looking at as we start the second quarter.

Interest Rates. Many ferocious battles take place, often out of sight, in the world of bond traders. Huge fortunes can be made or lost with the small, incremental changes in interest rates. Investors in Long-Term Capital Management in the late 1990's and MF Global more recently were victims of interest rate/bond interest rate bets gone wrong. But beyond this point, what do interest rates tell us?

Rising yields/falling bond values suggests:

There are more net bond sellers than buyers (more supply than demand) because investors-

-perceive better investments elsewhere (such as stocks)

-greater confidence in the economy (less fear, less need for safety)

-increasing fear of inflation (demand higher interest rates to offset higher prices of goods and services)

The converse is generally true when yields fall and bond values rise.

Therefore, in a very general sense, rising interest rates can signal greater economic activity, optimism about the future, and general economic confidence. However, too much of an increase and we could see the economy hampered as borrowing and lending dry up. I use interest rates as a general barometer of broad consensus of confidence and expectations in the markets. After all, bond investors are making 10, 20, and 30-year bets on the direction of interest rates and inflation.

DWA Statistics: I am always looking at the data provided by Dorsey Wright. Among the most important statistics is the New York Stock Exchange Bullish Percent (NYSEBP). I have discussed this particular statistic in numerous Updates in the past, and will not go into great detail here other to say that when the NYSEBP is rising and above 70% that is a very positive indicator of the strength of the stock market. During the first quarter of 2012, the NYSEBP increased from 53% to 74%. During March, the NYSEBP fell slightly but remains solidly positive. Should the NYSEBP fall below 70% it would signal a possible change in the general tenor of the markets and would be the first sign of caution.

I also watch the position and relative strength relationship of the five major asset categories tracked by DWA: US stocks, International stocks, Bonds, Commodities, and Currencies. How these five categories rank, how they are moving, and how fast they are moving, tell me a great deal about the underlying strength of the markets. As we start the second quarter, the US stocks category is solidly in first place followed by Commodities, Bonds, International stocks, and Currencies. The trend strength of Commodities and Bonds has been weakening recently so these major categories must be watched very closely to see if the trend further weakens or strengthens in the weeks and months ahead.

Europe: I believe that the problems in Europe are far from being resolved. The London-based Centre for Economic Policy recently announced that they believe the Euro zone fourth quarter 2011 GDP declined 0.3% and that trend was continuing into the first quarter (Wall Street Journal, March 30, 2012). The authors of the study cited austerity measures as a primary contributor to the contraction. A recession in Europe, even a slight recession, may negatively affect the region's major trading partners--the US and China. Investors will also be watching closely key elections scheduled for France and Greece in late April and early May. The existing leadership in both countries may be voted out to be replaced by candidates who have publicly challenged current agreements reached by both countries. This could jeopardize the fragile agreements in place and toss the region back into turmoil.

LOOKING AHEAD

As I previously noted, the US economy reminds me of watching a toddler riding a bicycle with training wheels-it is wobbly and uncertain, but moving generally forward. I believe this is precisely where we are today. Economic data is up, down, and everywhere in between. Time magazine's cover this past week is a perfect illustration of this point. Investors know that employment is improving, that the stock market is up, and housing may in fact be nearing a bottom, but why does it not feel better? I believe it is because unemployment remains high, political uncertainty creates stress, the mounting US debt appears to be unstoppable, gasoline prices are hurting families, and we are bombarded with negativity by a relentless 24-hour news cycle. Yet, the markets have been up and economic news is gradually improving. However, investors will continue to watch each economic data release to see if the economy is continuing to grow or running out of gas.

There are six important US economic data releases set this coming week. The most important is the March Employment Situation that will be released on Friday morning. Consensus calls for the overall unemployment rate to remain unchanged at 8.3% and a slight drop in the number of jobs created compared to February. This report is key because it signifies to many the general strength of the US economic recovery.

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 sizable 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. There has also been no changes within the sectors of the major asset categories from previous weeks. Please refer to last week's Update for specific comments.

I will conclude this week's Update by reminding everyone of the importance of having a portfolio that meets your individual needs and risk tolerance. Investing is necessary for insuring your long-term financial health and well-being. Investing within your own circumstances is necessary to meet those long-term needs and the rate of return of your own portfolios are relevant in the context of your life, not someone else's.

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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