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.

MARKET UPDATE AND COMMENTARY
January 12, 2014


With 2014 completed, I will spend a few moments discussing the year and then shift my focus to my thoughts regarding 2015. In my view the top three stories for 2014 was the fall in interest rates, the strength of the US Dollar, and the collapse in oil prices worldwide. I will address these stories in greater detail momentarily.

Below is an up-to-date look at key US equity index performance:

 Source: The Wall Street Journal (Past Performance is Not Indicative of Future Returns). Year-to-date returns are through January 9, 2015.

International markets under-performed the United States for a second consecutive year.

Source: The Wall Street Journal (Past Performance is Not Indicative of Future Returns). Year-to-date returns are through January 9, 2015.


Looking broadly at equity markets in 2014, it was a challenging time for diversified investors. Small capitalization stocks (Russell 2000) significantly underperformed large cap stocks after small caps led all key equity segments in 2013. Owning the S&P 500 index to the near exclusion of all other asset classes led to the best broad market performance in 2014. According to Morningstar®, less than one in four active managers in the large cap blend category were able to beat the S&P 500 index.

The Utility sector led the major economic sectors with a return of just over 24%, followed by Health Care (23%), and Technology (16%). Energy was the worst performing sector losing nearly 11% for the year.

Much like the equity markets, bond investors were not treated equally. The Barclay’s Aggregate Bond index which represents a broad swath of US bonds gained 5.9%. According to Morningstar® the volatile Long Duration US Treasury sector was the best performing bond sector gaining over 21%, followed by Long Duration Corporates at 12%, and Preferred Stocks at 11%. However, many other bond sectors under-performed. Emerging Markets bonds (-1%), Ultrashort bonds (0.3%), Bank Loan (0.5%), Short Government (1%), High Yield (1%) and World Bonds (1.7%) were the weakest performers

The UBS Commodity index, a broad indicator of commodity prices fell 17% in 2014 led by the collapse of oil and natural gas. West Texas Intermediate (WTI) crude oil fell 46% and natural gas lost 31%. Gold fell 1.6% in a choppy sideways market. Corn and wheat fell 6% and 3% respectively, and Cattle jumped 23%. A mixed bag but clearly driven by the drop in oil prices.

TOP STORIES IN 2014

Top Story #1--the drop in interest rates was not anticipated by investment professionals. The yield on the benchmark 10-year US Treasury fell from 3.03% at the end of 2013 to 2.17% at the end of 2014. This drop was unexpected because most economists felt that the end of bond purchases by the Federal Reserve (referred to as Quantitative Easing or QE) would reduce demand for new bond purchases and yields would rise to attract buyers. Clearly this did not happen. I believe this did not happen because the impact of QE on bond yields was not understood by most investors, and because of increased demand of US Treasuries by both domestic and international buyers anticipating higher yields in the US than abroad.

Top Story #2—the broad US Dollar (USD) index gained 12.8% in 2014, a large move in currencies. Looking at the two largest currencies beyond the US Dollar, the Euro and the Yen, the US Dollar gained 11.4% and 14.3% respectively. You have to look back to 2005 to see USD/Euro rates at this level. The stronger US Dollar is simply the result of demand exceeding supply. Demand is coming from international and domestic investors who are moving international investments here to the US. The why is up for debate, but I believe it is attributable to extremely low interest rates in Europe, a slowing Chinese economy, and renewed fears of a European Union (EU) crisis in Greece. Greek voters are returning to the polls January 25th to form a new government. The socialist party currently has a small lead and their leaders have threatened to destabilize the EU by reversing many of the austerity measures favored by the Germans and International Monetary Fund (IMF). There is an outside possibility, in my view, that Greece might exit the EU causing unknown consequences for investors.

Goldman Sachs has come out with a prediction that the Euro will reach parity to the US Dollar sometime in 2016 due to a lack of competitiveness in Europe, quantitative easing by the European Central Bank and generally lower interest rates compared to the US.

Top Story #3—the collapse in oil prices in 2014 was dramatic and has generated an enormous disruption around the world both in the energy markets and has the potential to destabilize some critical geopolitical regions like Russia, Iran, and Venezuela.

After falling 46% in 2014, WTI Oil has continued its slide and closed Friday at $48.36 and is now down another 10% since the start of 2015.

I spent some time discussing this story in the December 14, 2014, Market Update and Commentary so please go back and review if you missed (you can find my previous comments at www.ntrustwm.com). However, I will add that since writing that article, the continued slide in oil prices reflects, in my view, a belief that Saudi Arabia will no longer be the swing producer to help keep oil prices elevated. They have a strong desire to maintain their market share and are benefiting indirectly by putting pressure on Iran and other less-friendly oil-producing countries.

The drop in energy equity prices within the US, in my opinion, reflects concerns over reduced profitability and cost of production issues. I have a great deal of confidence that US energy companies will be able to continue to lead the way forward with technological developments. This in turn should continue to drive down the cost of production and make oil profitable at lower prices.


LOOKING AHEAD

I believe the top economic story for 2015 will be the timing and magnitude of the Federal Reserve’s expected interest rate hike. Keep in mind that the Fed only sets the Federal Funds rate which is the interest rate paid by the most credit-worthy banks for overnight borrowing. This has a great deal of influence on other rates, however, and all other rates are determined by open market transactions.

For the past five years, the Fed has maintained a 0% to 0.25% target for the Fed Funds rate. This is seen as an extremely accomodative monetary position geared to keep cheap cash flowing through the economy. Raising the Fed Funds rate will increase the cost of borrowing and has the potential to slow growth. The debate among economic policy wonks is whether or not an increase is warranted and if so, by how much. Complicating the debate is the fact that rates have never been held so low for so long coupled with such massive quantitative easing. Brian Wesbury, Chief Economist of First Trust Advisors, has said repeatedly that raising rates should have a minimal impact on equity markets because until the Fed Funds rate reaches 3.5% or greater, the policy by the Federal Reserve is simply “less accomodative” rather than restrictive.

It is nothing but speculation to try and peg the timing and the magnitude of Fed rate changes. All I can do is try to read the vast number of stories by economists and investors on this topic and try to gauge some kind of consensus about what the market is thinking. Here is what I currently believe:

1) The Fed Funds rate will be raised in 2015. Late spring/early summer is the market consensus for timing.
2) The Fed will try to telegraph the rate increase as much as possible within their market commentaries in order to allow the markets to come to terms with the new rate.
3) The Fed will keep the rate of increase very small at 0.25%. Additional increases will come slowly.

What is impossible to guage is the stock market’s reaction to the increase. Every hint of a rate increase has tended to push equity markets down which is, in my opinion, unwarranted. However, what I believe is irrealevent. What matters will be the market’s reaction. I will not speculate what that reaction will be until we get closer to the actual rate increase (assuming it happens at all). For bond investors, the key will be a gradual and orderly increase in interest rates. Sharp changes up or down in interest generally rates causes bond prices to fluctuate more than what is usually expected.

The other major story for 2015 is likely to be the continued weakness in oil prices. I believe lower oil prices is actually a significant boost to economic activity and that the fall of stock prices in 2014 and so far in 2015 is an overreaction caused by energy pricing fears. In my view, lower oil prices are positive long-term.

US equities are clearly the top-ranked major asset category on a relative strenght basis of the six I follow. Over the holidays, International equities fell from the second position to third being replaced by Bonds. I contine to recommend avoiding international equities, especially European stocks, due to their under-performance relative to US equities. The big unknown is whether or not the Eurpean Central Bank (ECB) will engage in quantitative easing. The ECB has resisted thus far, however, as the European Union continues to struggle economically, there is mounting pressure for the ECB to ease. If this happens, I would not be surprised to see stocks jump in value even though the fundamentals do not warrant such increases. I would also expect US stocks to rise in conjunction with such a move.

The Money Market asset category remains number four of the major asset categories followed by Currencies and Commodities. I believe the energy sector will remain under pressure for now until oil and natural gas prices stabilize, but keep an eye on precious metals. Even though I think gold is overvalued at this time, there has been a subtle shift upwards in the trend of gold prices.

I will wrap up by saying that I believe volatility will increase this year. Last year’s volatility was clearly an increase from 2013. We had several 5% corrections and one that slid into a 10% correction during the fall. Very normal. Volatility is extremely unpleasant and I am afraid we may see more volatility in 2015 due to the impacts of commodity prices and speculation over the Federal Reserve’s rate increase. That is the bad news, however, I do believe that US equity prices will end the year positive based upon the economic fundamentals with another low, double-digit gain similar to 2014.

I will expand on these themes and provide you up-to-date commentary going forward in 2015.

I wish everyone a very Happy New Year!




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 subindices, 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.

MARKET UPDATE AND COMMENTARY
December 14, 2014


Led by a decline in energy prices, US markets reversed direction sharply this past week following seven consecutive positive weeks (October 17th to December 5th, 2014). Last week’s drop was the worst one-week performance by the Dow Jones Industrial Average (DJIA) in about three years.

Source: The Wall Street Journal (Past Performance is Not Indicative of Future Returns)

International markets continue to underperform US markets.

Source: The Wall Street Journal (Past Performance is Not Indicative of Future Returns)

The most prevalent explanation given by the financial media for last week’s pullback was investor fears of a global economic slowdown as evidenced by the falling demand for crude oil. The Wall Street Journal reported that since June, the International Energy Agency (IEA) has cut its demand forecast for 2015 by 800,000 barrels, while it says U.S. oil output will rise next year by 1.3 million barrels a day. WTI Oil closed Friday at $57.81 per barrel some 41% below where it began 2014.

Bond investors echoed concerns over a global slowdown dropping yields on bonds worldwide. The benchmark yield on the 10-year US Treasury fell 21 basis points (a basis point is .01%--similar to a penny to a dollar) to close at a nearly 17-month low of 2.09%. Germany’s 10-year Bund closed at an astonishing low yield of 0.62%. Bond yields reflect investors’ outlook for economic growth and inflation, signaling weak growth and inflation expectations for some time to come. This is why I have been writing that higher interest rates would be a sign of better economic prospects especially in a low-inflation environment.

Gold prices are up 4% in December. I believe this is a normal reaction by some investors who buy gold when stock prices drop.

Finally, the US Dollar fell slightly against the Euro and the Yen last week; however, the US Dollar is up 9.4% and 12.8% respectively against these two key currencies in 2014. This dramatic change in currency valuation, in my view, says a lot about what has happened to markets around the world.

THE US DOLLAR, OIL, AND GLOBAL ECONOMICS

For those who have been reading my Updates over the years know one of my themes is that academics try to over-complicate economics by using very sophisticated mathematical models to predict or explain human behavior. I believe this is a fool’s errand (I am sure many economists would strongly disagree) and that economics can be summed up in three words: SUPPLY AND DEMAND. The more of something we have, all other things being equal, the less we will value that something; and if we want more than is available, we will be willing to pay more to meet our desires. Following this, the more people are willing to pay for something, the more others will try to meet that demand thereby increasing supply. As supply increases, prices inevitably fall. This is where we find ourselves today regarding oil. I will concede, however, that the circumstances around this simple supply and demand concept can be complicated, but I will attempt to explain the basics of how we got to $58 oil.

As you can see by the graph below, oil prices are volatile and have been subject to geopolitical shocks over the past 50 years beginning with the 1973 oil embargo. This curtailment of oil exports middle-eastern oil producers in response to the US support of the 1973 Arab-Israeli war increased the price of oil by nearly 400% almost overnight.

The 1979 and 2000’s oil price spikes were also driven by unrest in the Middle East. The United States and other western oil consumers did not sit back and wait for the next oil embargo; rather we took steps to lower our dependency on middle-eastern oil by reducing consumption and searching for oil elsewhere in the world.
One of the most notable efforts has been the extraction of oil in the North Sea. I highlight this because it shows how technology overcame extreme conditions allowing oil companies to drill for oil over 1000 feet under sea in some of the most inhospitable conditions anywhere. Today, the North Sea region produces about 1.5 million barrels each day. The most notable change in the US has been in technological developments with the shale oil boom in North Dakota, Texas, and coming soon to other states like Pennsylvania and California. This boom in US oil production, coupled with an overall reduction in demand, has placed pressure on oil prices. The two charts below show the changes in oil production and consumption over the past few years.

The drop in oil consumption, in my view, is a combination of much higher prices over the past decade or so and increased supplies. While the “doom and gloomers” are going to suggest that that drop in demand is due to a lack of economic activity, the chart below shows that US manufacturers are far more efficient in the use of oil in producing goods and services. This is a natural response to higher oil prices and makes our nation less vulnerable to oil price shocks.

Another component of the demand variable has been the value of the US Dollar (USD). I have discussed previously that the USD has been surging in value against most foreign currencies, especially the Euro and the Yen since May. It is difficult to identify one or two primary reasons for the renewed strength of the USD, but I believe it is fair to say that a steadily growing US economy, the end of quantitative easing in the US, the possibility of quantitative easing in Europe, very weak economic growth in Europe and slowing growth in China, and geopolitical instability around the world are some of the reasons for a stronger USD.

A stronger USD has an impact on the price of oil and thus demand. Since early May, the US Dollar Index (a measure of strength of the USD compared to a basket of six foreign currencies) has risen nearly 12%. The fallout of this move has been to raise the price of oil to the rest of the world since nearly all oil contracts are transacted in USD. As the USD rises in value, the cost of oil to all but Americans goes up (according to the most recent statistics by the US Energy Information Administration the US accounts for only 21% of worldwide oil consumption). This higher cost of oil to the world weakens demand leading to lower oil prices. I believe if the Federal Reserve starts raising interest rates next summer as many are expecting, this will continue to favor a stronger USD.

In reaction to falling prices, Saudi Arabia was expected—as they have in the past—to cut production to boost oil prices. They did not. This propelled the price of WTI Oil down from $73.69 (November 26th) to Friday’s close of $57.81 (-22%). I have read a number of pundits suggest this is an attempt to hurt US oil production. I believe this is off target. The real target of the Saudi’s willingness to let oil prices continue to fall is to hurt Iran and its ally Russia. Both countries are not friendly to Saudi interests and are heavily dependent on oil revenue to fund national budgets. Geopolitical issues continue to influence the price of oil.

Going forward, I believe the price of oil will find equilibrium as supplies adjust to meet demand. I have a lot of confidence in US oil producers to react to current events. I would expect that some projects could be held back and the more expensive drilling sites may be slowed or even taken offline. However, the long-term outlook remains positive for the US. Domestic oil production will continue to grow and the US could be energy independent in a matter of a few years. The benefits for the US consumer will be positive and other industries will benefit. Additionally, the US will continue to attract energy-intensive manufacturing to take advantage of our low energy prices and stable political environment.

LOOKING AHEAD

Volatility returned to the markets last week, however, my general view remains unchanged: the US economy is the place for investors to be and US stocks remain a good investment. Volatility is a challenge to everyone’s emotions, however, the relative strength data continue to suggest maintaining current US equity exposure.

On a relative strength basis, the US equites major asset category remains the clear leader and has not lost any strength to the other five asset categories. International equities has weakened and should be underweighted or avoided for now. The current relative strength ranking of the six major asset categories is: US Equities, International Equities, Bonds, Money Market, Currencies, and Commodities.

Most bond sectors have held up, however, as interest rates have fallen, the high yield and bank loan sectors have pulled back. I do not expect this to last and I believe there are good valuations in these two more volatile bond sectors.

Looking at key economic sectors, Health Care (+25%) continues to be the best performing sector year-to-date followed by Real Estate (21%) and Utilities (+19%). The Real Estate and Utilities sectors have, in my view, benefited by the drop in interest rates. Not surprising, the Energy sector is the worst performing sector having lost nearly 17% in 2014. The Energy sector is currently very oversold and I believe it may hold opporunities for select investments. The Transportation sub-sector offers potential as energy prices remain subdued.

I continue to watch the money market sector closely. I consider this sector to be a key gauge of where the markets are on a risk-adjusted basis. As of market close on Friday, the money market sector ranking had risen slightly from 126 (November 21st) to 119 out of the 134 sectors I follow. Even with the recent rise in ranking, 88% of all sectors are stronger on a relative strength basis than money market.

This will be my last Update and Commentary for 2014.

As we head into the Holiday Season, I want to remind everyone to be thankful for their health and family. I have a dear friend currently in the hospital in serious condition. I am reminded how fragile life can be at times and I ask everyone to say a prayer for him and others in need. I also want to say what a privilege it is to serve my clients and I value the trust each family has placed in me and I take this responsibility very seriously. I hope each of you have the opportunity to spend time over the next few weeks with family and loved ones and wish each of you a very Happy Holiday and Happy New Year.





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 subindices, 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.

MARKET UPDATE AND COMMENTARY
November 23, 2014


Central bankers from the European Union (EU), China, and Japan stepped up to take the initiative in their respective countries/regions to spur growth in the face of sagging economic reports. Meanwhile markets here in the US continued to move steadily forward.

Most key US equity indexes posted gains over the past two weeks:

Source: The Wall Street Journal (Past Performance is Not Indicative of Future Returns)

International markets, buoyed by recent central bank announcements, have also generally moved higher.

Source: The Wall Street Journal (Past Performance is Not Indicative of Future Returns)

The efforts by central bankers to ease monetary policy abroad gave stock investors a bit of confidence and helped drive up valuations last week, however, I also believe that it fits right within the narrative that I have discussed many times. That narrative is that central bankers can only mask the symptoms but not cure what ails Europe and Japan which are fiscal policies that stifle innovation, job creation, and entrepreneurship. China is a completely different model because it is communism seeking a way to inject a private sector component (capitalism) into the economy for economic growth and to provide opportunity to the billion-plus Chinese. While many favor China as an investment theme, I remain wary due to the lack of financial transparency, state ownership, and corruption that is so prevalent throughout their economy. In the end, European and Asian stocks may rise as they have so far this year, however, I believe they will lag US returns in general for some time.
Bond yields continued to slip downward last week with the benchmark 10-year US Treasury yield closing

Friday at 2.307% and is now down 2.5 basis points (a basis point is .01%--similar to a penny to a dollar) for the month. The broad Barclays US Aggregate bond index gained 0.1% for the week and is now up 5.6% for the year. The decline in interest rates has been attributed to renewed confidence of investors that central banks are willing to buy bonds in an effort to stimulate economic growth. The US just completed the third round of bond buying (also referred to as Quantitative Easing) with little to no effect on growth. The only thing I can say is that quantitative easing gives investors a psychological lift and that can help in the short run.

Commodities received a boost with the Chinese central bank lowering interest rates on Friday causing investors to speculate that lower interest rates will spark renewed demand for primary commodities by the Chinese. Oil and gold both rose last week with WTI Oil gaining $0.69 per barrel (+0.9%) to close at $76.51. WTI Oil is still down 22.4% for the year. Gold gained $12.10 per ounce (+1.0%) to close Friday at $1197.70. Gold is almost unchanged for the year recording a drop of just 0.4%.

SOME PRELIMINARY THOUGHTS ABOUT 2014

It is not too early to look back at the year and draw some meaningful conclusions, so let me make a few brief observations.

• The US Dollar strengthened dramatically in 2014. The Euro is down nearly 10% and the Japanese Yen is down almost 12%. These moves signal a strong demand by international investors for US bonds and stocks, and a general confidence in our economy. I share that confidence. The rise in the US Dollar makes imports from Europe and Asia cheaper and it helps drive down energy and other commodity prices. I think for the average American, this is very good news. For US investors a rising US Dollar acts as a strong headwind on returns in international investments accounting, in part, for the lag in international stock performance.

• Oil prices have fallen dramatically in 2014. This is a real boost for consumers here and has helped keep inflation in check. The transport stocks have benefited by this drop saving airlines and truckers billions in fuel savings.

• Interest rates fell in 2014 when all the pundits were predicting a rise due to the end of quantitative easing by the Federal Reserve. This was a big miss by economists and, I believe, points to the futility of central bankers’ efforts to stimulate the economy by purchasing bonds. Interest rates are comprised of economic growth and inflation expectations and bond purchases by the Fed does not change this fundamental fact. I believe we will continue to see low inflation (1.8%) and modest economic growth (2.5% to 3.5% in real terms). This forecast has been the same for several years now.

• While not reported by the financial media, we did have a 10% correction by the S&P 500 this fall. Well, technically it was 9.9%, and it was off of intra-day highs and lows, not market close to market close. Corrections do happen and so we have had a 5% correction and a 10% correction within the same year. That is quite a change from 2013 when we had none. I have no way of predicting how the next six weeks will work out, but as I have said for some time, I do not believe we are on the verge of a stock market collapse or that we are in a bubble.

• The geopolitical situation abroad remains tenuous and the political temperature here at home is rising. While the Ukraine, the Middle East, and Pacific regions have quieted somewhat, I can say that there is still plenty that can go wrong and possibly impact the markets. Closer to home, the President’s recent executive order regarding immigration has increased the likelihood, I believe, in a harsher political discourse and raise uncertainty in investors. Overall, however, markets have ridden the trials of global and domestic tensions well this year.

I will certainly have more to say in the coming weeks about 2014 and 2015, but for now, my suggestion is to get focused on the holidays and let’s see how the rest of the year plays out.

LOOKING AHEAD

As I said at the top of my Update and Commentary, central bankers have been working overtime to use monetary policy tools to shore up flagging economies. I think these are stop-gap measures at best. They are also, if you look closely at the US over the past five years, not particularly effective. I will say that what is more instructive is to recognize that stock markets go up because of economic expectations—not last month’s news, and because companies are profitable.

While I am bearish on Europe today and cautious on Asia, I remain fully committed to the US. I believe the US remains the most vital, flexible, and dynamic economy in the world. These adjectives translate to real actions which in turn lead to more profitable companies. I read an article this past weekend in the Wall Street Journal about how international stocks were undervalued and therefore a bargain. They also talk about how international stocks have gone up, but just not as much as US stocks. Given a choice, I prefer investments that go up more than others, therefore, I will continue to underweight international stocks for now.

The trading week will be shortened by the Thanksgiving holiday this coming week. Markets are closed on Thursday and will close early at 1 PM on Friday. Most international markets will be open. Although the week is usually a quiet one with many traders off on holiday, there are a couple of key economic reports coming out. The second estimate of the 3rd quarter gross domestic product (GDP) will be published Tuesday morning at 8:30. The consensus expectation is for a slight contraction from the first estimate from 3.5% to 3.3%. I am not expecting any significant changes to the GDP. Wednesday morning will be busy. October durable goods orders, new home sales and personal income reports will all be released. I would not expect any surprises here with this economy trudging along as it has for so many months now.

Thanksgiving is one of my favorite holidays because it causes us to stop and think about what we have to be thankful for. I hope that your week is spent surrounded by those you love and cherish.

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 subindices, 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.

MARKET UPDATE AND COMMENTARY
November 9, 2014


The 2014 mid-term elections brought sweeping changes to the US political landscape with the Republican Party reaching levels in Washington, DC, not seen since the late 1940’s. State elections were equally profound with the Republicans winning governor races in some of the bluest states like Maryland, Illinois, and Massachusetts. Although the Republicans did not run a national campaign, it is clear from a state and local level that voters elected individuals promising to address the economic stagnation felt by many workers. It is too early to tell if Republicans will be successful in delivering on their promises, but I think we will certainly see a very different Congress in January.

Most key US equity markets posted gains over the past three weeks:

Source: The Wall Street Journal (Past Performance is Not Indicative of Future Returns)

Positive economic statistics and corporate profits contributed to recent market gains; however, I also believe investors were beginning to sense that the status quo in Congress was about to end.

International stocks continue to struggle. The broad international MSCI EAFE index was off -1.01% last week and the European-heavy STOXX 600 fell -0.46%. The European Commission cut its outlook for Euro zone growth on November 4th predicting the region will grow just 1.1% in 2015 compared to its forecast of 1.7% six months earlier. The European Union (EU) managed to stem a major confrontation when the French and Italians pledged budget adjustments to improve their 2015 debt forecasts delaying the sanction of fines for violating the Growth and Stability Pact for now; however, these countries will remain under scrutiny to insure they deliver on their pledges. All of this is putting pressure on Mario Draghi, European Central Bank President, to adopt a US-styled quantitative easing program. While the effectiveness of quantitative easing (QE) remains uncertain and will be debated for years to come, I believe two likely outcomes of the Europeans expanding their own QE will be a continued weakening of the Euro (helping exports to the US and other non-EU countries), and further delays of meaningful fiscal policy changes. Without significant fiscal policy changes in labor and tax laws, I believe the EU will struggle to create the growth necessary to overcome the current economic lethargy.


Bond yields edged slightly downward this past week after two weeks of increases. The US 10-year Treasury yield fell -3 basis points (a basis point is .01%--similar to a penny to a dollar) to close Friday at 2.30%. Despite the slight decrease in interest rates, the broad Barclays US Aggregate bond index managed to post a 0.1% gain for the week and is now up 5.5% for the year. The decline in interest rates came following the release of the October Employment Situation report that indicated a gain of private sector jobs of 214,000 compared to an expected increase of 240,000. Additionally, weekly hours worked remained unchanged at 34.6 hours, and wages increased 0.1% compared to an expected increase of 0.2%. The modest tone of this critical economic report failed to convince bond traders to change their overall outlook on economic growth or raise concerns that the Federal Reserve will act sooner than anticipated in raising interest rates, in my view.

The big story within commodities is the continued weakness in oil prices. For the year, WTI Oil has fallen $19.90 (-20.2%) per barrel to close Friday at $78.65. Energy prices have been slipping on a combination of increasing supplies, slowing global economic growth, and a stronger US dollar. The energy sector as a whole is the weakest performing major sector in 2014 with a loss of roughly 1.7%. Weaker energy prices have been beneficial to the average consumer by increasing disposable income, and especially to the airline industry whose profitability is closely correlated to oil prices. Other fuel-intensive industries such as package delivery and trucking should also begin to see a benefit from reduced fuel expenses.

ECONOMIC RAMIFICATOINS OF THE 2014 MID-TERM ELECTIONS

I have read numerous studies over the years that discuss market performance following major elections like the one we just experienced. They are interesting and certainly have a story to tell. Bob Doll, chief equity strategist at Nuveen Asset Management, highlighted this past week that the S&P 500 has jumped 16% on average in the six months following mid-term elections since 1950. Additionally, Doll said that on average the stock market has gone up over 18% in the third year of a president’s term over that same period. His explanation for the six-month increase was the removal of uncertainty in the markets, while he believes the third year of growth is a result of presidents trying to juice the economy in the years leading up to a major presidential election. These broad conclusions are interesting, but what matters to us is tomorrow not yesterday.

I do believe there are some conclusions that can be drawn now. First, with control of the Senate turning over to the Republicans, I anticipate that pro-growth bills will start moving to the President’s desk. What the President does with those bills is anyone’s guess, but votes will be taken, bills will be passed, and positions staked out prior to the 2016 presidential election. Second, I believe that the Republican majority will follow through on their promise to address issues they believe are slowing the economy. Some of these issues include approval of the Keystone Pipeline construction project, major overhaul of the Affordable Care Act (ACA), and addressing perceived excesses of agency rule making by the EPA, Treasury (Dodd-Frank, inversion), and other organizations. Third, look for bipartisan efforts to lower corporate taxes. This could potentially give a boost to the stock market through higher profits and encourage new investment. How successful any of the Republican legislative agenda will be in spurring growth in the economy is unknown at this time due to the many political and geopolitical challenges that still lie ahead.

Looking at what economic areas might benefit by the Republican victory in the mid-terms is a very speculative proposition because while the Republican leadership and caucus may have their agenda, the Democratic Party and President Obama do not support that agenda. That being said, here are some of my thoughts about which sectors might benefit from the elections:

Energy: in addition to pushing for the Keystone Pipeline, the Republicans are supportive of carbon energy. Look for more favorable legislation to counter some of the anti-carbon rule-making coming from the EPA. The US has tremendous potential for exports of coal, liquid natural gas, and even oil if energy companies and these opportunities can be expanded by streamlining regulatory approvals for drilling permits, construction licenses, and export permits. The decline in the global economy and falling energy prices, however, may slow the realization of increased returns in this sector.

Defense: I think Republicans will likely push to increase defense spending to counter growing threats from China, Russia, and ISIS. The world is not a safe place and the US will be required to maintain a high state of readiness to counteract these threats.

Health Care: I believe the future of the Affordable Care Act (ACA) as currently written will be challenged. I do not think the Republicans will be able to “repeal and replace” the law in its entirety, but I do believe they will be able to chip away at some of the more unpopular provisions. Look for repeal of the medical device tax early on. There is bipartisan support for this move. I also expect early legislation to replace the law’s definition of fulltime employment from a 30-hour workweek and with a 40-hour workweek. I have read subsidies to insurance companies to help offset the costs of insurance premiums might be eliminated. This could be a real blow to insurance companies in the short-term. The health care sector has been one of the strongest in 2014, but I do not know if the sector will continue to outperform given the increased uncertainty facing many health care companies. However, the aging demographic within the US will continue to place heavy demands on health care companies helping offset some of the negative effects of potential legislative uncertainty.

With all the discussion about how the Republican Congress will affect the fiscal policies of the nation, do not overlook the Federal Reserve and monetary policy. Fed Chairwoman, Janet Yellen, spoke this past Friday in Paris to European central bankers. Among the many topics she discussed, she said that as our short-term rates begin to rise, “some heightened financial volatility” is likely to occur. I interpret her statement to suggest that stocks will fall when rates go up. I expect the Fed will try to give markets plenty of warning to dampen the negative impact on stocks if Ms. Yellen’s views are correct. There is no clear consensus about when the Fed will actually start raising rates; however, the financial media is reporting a range from spring of next year to early 2016.

LOOKING AHEAD

I suspect that the dust will begin to settle this week following the intensity of last week’s elections. Time to turn our attention to the markets and what is happening in the economy.

Profits remain strong. Reuters reports that 88% of S&P 500 companies have reported 3rd quarter earnings with 74% exceeding analyst estimates. However, the same article reports these analysts keep trimming their profit forecasts, and that earnings growth for the fourth quarter is now estimated to be 7.6% compared to the 11.1% estimate on October 1st. The ability of companies to continue to grow revenues and profits has the potential, in my opinion, of becoming an increasingly important story and worth watching closely.

I continue to hold little confidence that Europe will fix itself anytime soon. If the European Central Bank launches a massive quantitative easing program, I would expect stocks to react positively; however, I do not believe real economic growth will return in any meaningful way and stock performance will likely continue to lag the US. The prospects of continued violence in Ukraine is also contributing to my decision to underweight the international asset category. I am also growing increasingly concerned with the Emerging Markets region. Addressing the same Paris conference last Friday as Ms. Yellen, New York Fed President William Dudley said rising interest rates in the US “could create significant challenges for those emerging market economies that have been the beneficiaries of large capital inflows in recent years.” A potential serious warning for investors in Argentina, Brazil, Chile, Indonesia, Russia, South Africa, and Turkey in particular.

According to DorseyWright & Associates, US stocks continue to dominate the rankings of the top six major asset categories followed by International stocks, Bonds, Foreign Currency, Cash, and Commodities. I continue to recommend over-weighting US stocks in equity allocations.

I remain positive regarding US equities. As always, there are reasons for caution and today is no different. However, do not let short term worries override longer term investment decisions. Markets never go straight up, even in the best bull markets, and this time is no different.

Tuesday is Veteran’s Day and I want to take the time to acknowledge all our veterans past and present. I was privileged to grow up the son and grandson of soldiers and I followed them into Army where I served with the most amazing and talented men and women. One very special group was my leadership team when I commanded an artillery battery in Germany. These men were the best of the best and I was honored to serve with them. Freedom has always carried a heavy price and we continue to face threats from abroad, but I am thankful that our nation is blessed to have young people yesterday and today like these guys who are willing to serve and defend this great country.
L to R: SFC Shiver (Smoke), 1SG Melvin (Top), CPT Merritt (BC), 1LT Johnson (XO), 2LT Lechowitch (FDO), and SFC Dennison (Gunny)

If you have any questions or comments, please reach out to me.





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 subindices, 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.