MARKET UPDATE AND COMMENTARY
January 25, 2015


The first three weeks of 2015 reminds me a bit of watching season 5 of Downton Abbey—lots of different plot lines at work, some surprises, and the expectation that there is a lot more excitement on the horizon.

US markets generally had their first positive week of the year this past week, but except for the NASDAQ Composite index, all the major indexes I follow remain in negative territory for the year.

The quantitative easing (QE) program announced Thursday by the European Central Bank (ECB) generally helped international stock markets—especially those in Europe (STOXX 600).

Other markets also reacted to the QE announcement. The Euro fell 3.1% last week and is now down 18.5% since the start of 2014. The Euro closed Friday at $1.12 the lowest level since the fall of 2003. Interest rates fell across Europe with the 10-year German Bund closing Friday at 0.36% with France (0.54%), Spain (1.38%), and Italy (1.53%) falling as well. Greek 10-year bonds closed Friday at 8.17% indicating investor nervousness over the ability of Greece to make good on their obligations. I will talk more about Greece shortly. The price of gold continued to rise gaining 1.2% for the week and is now up 9.2% for the year. I believe this rise is due to a weakened Euro and the continuing decline of interest rates in Europe. A number of European countries (Germany, Belgium, France, and the Netherlands) currently have negative interest rate yields on their 2-year notes making a 0% returning gold bar a more attractive investment than a negative yielding government bond for some investors.

Oil continues to fall. WTI Oil fell 6.4% last week and is now down 14.4% for the year closing Friday at $45.29 per barrel. WTI Oil peaked last June 25th at $100.36 and has fallen 54.9% six months. The death of King Abdullah bin Abdulaziz al Saud, the 90-year old monarch of Saudi Arabia, has raised some concerns among oil traders over the stability of an already unstable region. After a brief increase in oil prices on Thursday when the King’s death was announced, oil prices continued to fall. Prices have not found a firm bottom but I believe they will find a floor soon or at the very least, the rate of decline will slow.

UNCERTAINTY AND THE MARKETS

Investors dislike uncertainty. They also dislike the volatility that uncertainty brings. As we start 2015 we have a number of very serious, big issues that may impact the markets. How and when these issues will be resolved or clarified contribute to the overall nervousness of the markets. Here are the four biggest issues facing investors today in my view:

Greek Parliamentary Elections. The Greeks went to the polls today (Sunday, January 25, 2015) to vote for a new government. As I write this, the leftist party, Syariza, appears headed to take the majority of seats in the

parliament. The leader of the Syariza party, Alexis Tsipras, has vowed to overturn the austerity agreements reached between the previous majority party, The New Democracy Party, and the European Union (EU), the International Monetary Federation (IMF), and the ECB. Tsipras believes that the austerity agreements have hurt Greek citizens and hindered economic recovery and he ready to take on the rest of Europe to accomplish his goals. There is just one little problem—Greece is broke and they cannot pay their old debts or any new ones they incur.

Mr. Tsipras has said that he intends to renegotiate the terms of the €240 billion ($269 billion) of loans provided to Greece by the EU/IMF/ECB. He wants to cut taxes, increase spending, and do all of this with the cooperation of Greece’s lenders. I believe that Mr. Tsipras will get his agenda pushed through in the parliament because he will have the majority necessary to pass. What is uncertain is how the European governments and creditors will react. My view is that other Europeans will not be willing to offer Mr. Tsipras much in the way of concessions.

The EU is in a tough spot. If they renegotiate with Greece and cave on Greece’s demand, there will be no way for the EU to credibly impose sanctions on other weak and non-conforming countries. If the EU does not negotiate, it is hard to see how Greece remains in the EU. Without the ability to print money, Greece will simply run out of Euros and will be forced to default on not only their bond payments, but on pensions, civil servant pay, and other components of the Greek government. If the Greeks leave the EU, it is very, very difficult to anticipate the consequences on the rest of the EU both politically and financially. Could this be the beginning of the end of the EU and the Euro, or is it more like culling the heard of weaker members leaving the remaining countries in a stronger

position? The potential pain for both the Greeks and Europeans is such that I sincerely hope they can reach a compromise and find a way to move forward.

What I believe Greece and other European countries need are vibrant private sectors that ultimately come from lower taxes, less government spending, and flexible labor laws. I have not seen much progress made on these issues in Greece or anywhere else in the EU. Therefore, expect more of the same with QE giving political leaders more time to reform their economies.

US Federal Reserve Short-term Interest Rates

I discussed this topic in my last Update and Commentary so I will not spend a great deal of time on the subject. What I do want to bring up is the growing uncertainty of when a rate increase is likely. The ECB’s launching of a 12-month QE program would put the ECB and Fed policy at opposite ends. Central bankers typically like to work in unison not at odds with each other. Additionally, inflation is very low and not likely to increase much over the next six months. Oil prices have greatly helped hold inflation down. With inflation subdued and US economic growth below 3%, it is hard to understand what the urgency is for the Federal Reserve to raise rates. However, I believe that the Federal Reserve will raise rates at some point this year. The greatest uncertainty in my opinion will be the impact the eventual raise will have on stock markets. A small, 0.25% increase should have a minimal impact on stock prices, but we just do not know at this point.

Global Geopolitical Uncertainty

The world remains very unstable. The terrorist attacks in Paris, the collapse of the Yemeni government, and the beheading of a Japanese citizen by Isis are just a few reminders of how fragile the Middle East is. Putin and the Ukraine is another hot spot, and the apparent murder of an Argentinean prosecutor remind us that other troubles exist as well.

Domestic Political Uncertainty

After watching the State of the Union speech last Tuesday, I came away with the belief that Washington, DC, will remain divided and new growth-oriented fiscal policies will be minimal and hard won in 2015. I believe it is difficult for investors to determine how federal regulation and legislation will change in the current Congress, and how those changes will impact their bottom lines. I also believe that the next 22 months will be all about posturing for the 2016 elections.

These are four issues I can see today. As it looks to me, we may see much of the same kind of markets we had last year only with a bit more volatility. There is always the possibility of some unanticipated event propelling the markets in directions or magnitudes completely unexpected. That is the nature of investing.


LOOKING AHEAD

I have laid out some of the major issues that I believe may affect the market in the future. What does the market look like today?

US stocks remain the favored major asset category of the six I follow. Here is a graph of the current rankings:


This chart provides a graphical representation of how the major asset categories rank on a relative strength basis. This chart is “slow” meaning it is designed to be a true long-term indicator of the strength between the major asset categories. There has been a very slight weakening in the US (Domestic) Equities ranking falling from 342 to 336 last month.

Within the US Equities category, Small Cap Growth, Mid Cap Growth, and Mid Cap Blend are the strongest on a relative strenght basis of the size/style categories. Large Cap Growth, Blend, and Value are the weakest. Again, it is important to recognize that relative strength rankings are generally longer-term indicators so you may find some inconsistency with the rankings and short-term performance.

Finally, within the US stock space, the current sector relative strength ranking system is as shown:

Health Care continues to do extremely well while we all know the story of what has happened to the Energy sector over the past six months.

Looking forward to the coming week, the Federal Reserve Open Market (FOMC) is meeting on Tuesday and Wednesday. The markets will be waiting for the Wednesday, 2 PM, news conference with Chairwoman Janet Yellen. I believe that the market will be expecting a change in language to suggest that the FOMC’s timeframe for raising rates is diminishing. Also, the FOMC’s view of the economy is important to investors as well. The first estimate of the 4th Quarter 2014 Gross Domestic Profit (GDP) will be released Friday morning. This is a very important number to the Federal Reserve and will no doubt influence their thoughts during their meetings on Tuesday and Wednesday. The consensus is anticipating a quarterly growth rate of 3.2%, down from the 3rd quarter’s 5.0% increase.

There is a lot of information for the markets to absorb next week. Europe, the Middle East, the FOMC may all contribute to movements in the markets next week. I remain committed to US stocks as the best place to be in the market for now.

Do not let the volatility in the markets hinder you from making good investment decisions. If you have any questions, do not hesitate to reach out.



Paul L. Merritt, MBA, C(k)P®, AIF®, CRPC®
Principal
NTrust Wealth Management

P.S. If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

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.

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. The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of sub indices, measuring both sectors and stock-size segments, are calculated for each country and region.

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 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. The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
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.