Thursday, May 24, 2012
This week's Market Update will be abbreviated due to my travel over the past weekend.
Selling across all markets accelerated this past week as the world watches the Greek government implode. This little, and historically poorly run country in financial terms, has caused markets to react negatively to the news of a possible exit from the Euro currency and European Union. The nervousness by investors has more to do with two key points: first, if Greece can go-who is next? Second, once the spendthrift Greeks are dispatched, who will be next? Spain and Italy are top candidates. These countries have large economies and many pundits do not believe that the EU has the assets for a bailout of these two weak economies.
The other drama that is playing out in Europe and here in the United States concerns the strength of German Chancellor Angela Merkel's commitment to austerity in the EU. Ms. Merkel is coming under increasing pressure from all sides, including President Obama, to loosen up the constraints on the European Central Bank (ECB) and get money flowing directly from the ECB to the sovereign governments within the EU (through the creation of Euro Bonds). The only problem, and one that the German's keep reminding everyone about, is that the treaty forming the EU does not permit direct payments to sovereign governments. So as Greece remains in chaos and many of the Europeans begin to tire of austerity cuts, and the Germans continue to ask other EU countries to undertake meaningful fiscal reforms, the rest of us are left wondering how much collateral damage will be extracted on the rest of the world. Unfortunately, there does not seem to be any consensus on this key issue so we will have to continue to observe events as they unfold and the market's reactions to those events.
"You can observe a lot by watching," is one of my favorite Yogi Berra quotes. For those of you who are not baseball fans, Yogi was a catcher for the New York Yankees from 1946 until 1963 and is one of the most beloved and successful ball players in baseball history. As an aside, Yogi began his professional baseball career playing here in Hampton Roads for the Norfolk Tars in 1942. Yogi's quote is very profound and one that I believe in regarding financial markets. I am watching interest rates, the strength of the US dollar, the New York Stock Exchange Bullish Percent (NYSEBP), and the Dorsey Wright Dynamic Asset Level Investing (D.A.L.I.)® indicators.
Interest rates have fallen sharply over the past month or so. The US Treasury 10-year yield closed Friday at 1.714%. The most recent inflation data from the Bureau of Labor Statistics showed the current annualized rate at 2.30% meaning that investors are receiving a negative 0.589% real return on their investment. That is a very risk adverse trade and indicates that parking money with a nominal return is more important to investors than making money. The US dollar has risen steadily since the start of the month. I believe that a rising US dollar is a risk adverse trade and global investors are buying US dollars for safety. This means that US exports become more expensive, commodities become more expensive, and returns of foreign stocks are impaired by the currency conversion. The NYSEBP continues to fall meaning that fewer stocks have positive momentum for now. I will be looking for that to change. Finally, the five major asset categories that I track using D.A.L.I. have been jumping around with the exception of US stocks. The US equities category has been the consistent leader among the asset classes and is now followed by Bonds, Foreign Currencies, Commodities, and International stocks have fallen to last place.
Times are challenging and the markets reflect this reality. I am watching Europe closely and looking for any significant movement of the key indicators discussed above.
If you have any specific questions, please give me a call. I wish everyone a very Happy Memorial Day and please take a moment to remember the sacrifices made by our men and women in uniform who have made this country great. Our freedom and security are their legacy.
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.
Paul Merritt, MBA, AIF ®, CRPC ®
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.
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.
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Posted by Paul Merritt at 11:21 AM