Tuesday, May 8, 2012


A disappointing employment report moved stock and commodity markets down sharply on Friday resulting in a disappointing week for investors. The sell-off came after the Dow Jones Industrial Average (DJIA) reached a nearly 5-year high on Monday of 13,360. The official April unemployment rate dropped to 8.1% on an anemic monthly non-farm

jobs gain of 115,000 jobs when consensus was calling for an increase of 165,000. More troublesome was the continued drop in the labor force participation rate. The participation rate is the statistic measuring the number of working-age Americans holding jobs. This number fell by 342,000 to a rate of 63.6%. This is the lowest participation rate since December 1981. In an editorial on May 4th, the Wall Street Journal, pointed to a number of factors contributing to this decline including an increasingly older working population, slow job growth making it harder for the unemployed to find their way back into the labor market, and stagnant wage growth which gives less incentive to the unemployed to go out and work. Whatever the reason, the markets reacted negatively to the poor employment news and the dimming prospects for a stronger recovery.

For the week, the DJIA posted a loss of 190 points (-1.44%) and the S&P 500 lost 2.44%, its worst weekly performance in 2012. The Russell 2000 lost 4.07% and the NASDAQ fell 3.68%, each matching the S&P 500 for the worst weekly performances in 2012. For the year, the DJIA is up 6.7%, the S&P 500 has gained 8.9%, the Russell 2000 is positive by 6.9%, and the NASDAQ is up 13.5%.

All of the major economic sectors were negative last week except for Telecom which was unchanged. In addition to Telecom, the best performing sectors were Utilities and Real Estate both of which were down less than 1%. The worst performing sectors were Energy, Materials, and Information Technology each losing around 3.75%. For the year, Consumer Discretionary, Financials, Information Technology, and Real Estate are the best performing sectors with each posting double digit gains. Utilities, Energy, and Telecom are the weakest sectors with Utilities and Energy posting slightly negative returns.

Europe remains a region under duress. Economic growth is flat to negative, unemployment levels exceed 20% in countries like Spain and Greece, and voter discontent is growing. National elections in Greece and France are expected to toss the incumbents and be replaced with more anti-European Central Bank (ECB)/anti-Germany regimes. NOTE: It appears that Socialist Francois Hollande has defeated President Sarkozy 52% to 48%. The Dutch government is getting bounced after undertaking modest austerity measures. Not surprisingly, the European-heavy MSCI EAFE index dropped another 2.5% last week and is now up just over 5% for the year. It is also why using relative strength analysis tools, Europe and most of their countries rank in the bottom third of my international analysis.

With the bad news coming from Europe last week the Euro fell nearly two cents (-1.36%) against the US dollar to close Friday at $1.308. The US Dollar Index gained 1% and is now down just 0.85% for the year. The currency market has been subdued this year and I believe reflects the general uncertainty of investors about the unending actions by central banks around the world.

Commodities were hit hard last week after economic data both here and abroad raised doubts about the overall strength of economic recovery. The Dow Jones UBS Commodity Index constructed with a broad basket of commodities fell 2.7% last week and is now down 2.5% for the year. Oil prices fell especially hard on the unemployment data with WTI oil falling 4% on Friday alone. For the week, WTI oil fell $6.44 (6.14%) to close Friday at $98.49 breaking below the $100 per barrel mark for the first time since February 7th. Gold prices also fell posting a loss of $19.60 per ounce (-1.18%) to close last week at $1645.20.

Bond markets gained for the seventh consecutive week with the Barclays Aggregate Bond Index adding another 0.33%. US Treasury yields fell (prices up) with the 10-year and 30-year rates closing Friday at 1.876% and 3.071% respectively. All the major European yields also fell and the German 10-year Bund is now trading below 1.6%. There is no rational explanation for an investor purchasing US Treasuries at these prices, especially the 10-year Treasury, while the official inflation rate in the US is 2.65%. This means that the real return (actually yield minus rate of inflation) for investors is now a negative 0.8%. Stated another way, investors are willing to lose nearly 1% per year for the safety of owning a 10-year Treasury bond. For the week, extended duration US Treasuries was the best performing bond sector followed by Emerging Market Debt and Municipal bonds. The worst performing sectors were Short Duration US and International bonds and Inflation-protected bonds.

SELL IN MAY AND GO AWAY AND OTHER THOUGHTS

This old market adage has been around for years. It does have historical basis upon which the adage is based, and over the past couple of years, this has been especially visible. According to research conducted by Dorsey Wright & Associates (DWA), during the seasonably weak periods (May 1st to October 31st) the DJIA was up 1.0% in 2010 and down 6.7% in 2011, while during the seasonably strong periods (November 1st to April 30th) for the same years the DJIA was up 15.2% and 13.3% respectively. Looking back over the past 62 years, the average DJIA return during the weak period was -0.17% while the return was 7.10% during the strong period. Most of us do not have a 62-year holding period, but this relationship certainly warrants consideration when making investment decisions.

Bill Gross of PIMCO writes a monthly commentary and I always look forward to reading his current insights. He

usually delivers his message in a clever context and this month was no different. But stripping the cleverness aside, he makes an important point that I believe should be highlighted. As most of you know, the Federal Reserve has engaged in two rounds of formal quantitative easing (QE) and one informal round (Operation Twist). QE is an accommodative monetary policy in which the Fed encourages economic growth by injecting new money into the economy through Treasury bond purchases in the open market. Operation Twist is a slight derivation of QE where the Fed takes maturing short duration notes and bonds and purchases longer (5-30 year) Treasuries. Bill Gross points out that stock markets lost between 10% -- 15% after QE I and QE II lapsed in March 2010 and June 2011. Operation Twist is scheduled to end June 30th precisely one year following the end of QE II. I do not know if the end of Operation Twist will cause markets to decline yet again, however, investors must remain alert.

Finally, I would like to mention the discussions starting to surface regarding the impact of the potentially massive tax increases on January 1, 2013. I have intentionally avoided the topic because we are still several quarters away from this happening and a lot can change between now and then. However, there is a lot of discussion popping up on both sides by observers who see potential market doom or little impact. All pundits have agenda’s and I think this debate clearly reflects that, so I caution you on being sensitive to these biases. However, I do think that there will be some negative impact on the economy as taxes potentially take away more spending power from consumers. This comes as wage growth struggles to keep up with inflation and workers find their take home pay shrinking.

LOOKING AHEAD

The elections in France and Greece will be endlessly analyzed during the coming week and rightfully so. Changes in political leadership and direction within those countries has the potential to send the European Union back to the

drawing board in an effort to sort out their economic mess creating a new round of anxiety for investors. Here in the US investors will become even more focused on any economic reports that speak to the growth of the US economy. Last week’s numbers left investors struggling to find direction as the economy continues to “muddle.”
The coming week has relatively few key economic reports due out. Thursday’s initial jobless claims are expected to remain unchanged (366,000 vs. last week’s 365,000), and the international trade report is expected to show an modest increase in the trade deficit. The Producer Price Index, a measure of change in prices paid by domestic producers of goods and services, is expected to be unchanged on Friday.

The highlight of the week is Fed Chairman Bernanke’s speech Thursday to a conference in Chicago. Investors will be looking for any hint of the Chairman’s commitment to another round of QE upon the completion of Operation Twist and following recent dissapointments in the Gross Domestic Product and employment growth. As investors become more and more nervous about economic growth, any deviation from consensus or changes of view by Mr. Bernanke, I believe has the potential to push the markets as last Friday’s employment report did.

For now, my views about the markets developed through the DWA relative strenght analysis is unchanged. US stocks remains the strongest asset category followed by Commodities, International stocks, Bonds, and Currencies. US stocks retain a very sizable lead over the other categories. International stocks and Bonds have moved into a tie with a slight nod to International stocks. 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 (NYSEBP) fell again last week and remains in a seven week negative trend. The current reading of 64.84 is down from the high of 76.04 reached on February 17th. Even as the DJIA was reaching new heights last Monday, the broader market continues to lose strength.

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.

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