MARKET UPDATE AND COMMENTARY
February 22, 2015


US and International markets have rallied in February in the face of growing fears that Greece will disrupt the unity of the European Union (EU) by dropping out of this important politico-economic organization. Greece and the EU (along with the International Monetary Fund—IMF, and European Central Bank—ECB) have struggled to find common ground with the newly elected Greek leadership and negotiate new debt service terms agreeable to both sides. However, late Friday it was announced that the parties involved had agreed to a four-month extension of the debt deadline. The agreement provides both parties time to continue negotiating without the immediate threat of Greece’s economic collapse. While the markets cheered this development, the crisis is far from resolved and the retention of Greece within the EU remains uncertain.

The US equity market is now up each of the first three weeks in February reversing January’s negative performance. In addition to reacting favorably to news about Greece, investors were satisfied for now with Federal Reserve Chair Janet Yellen’s recent comments suggesting that raising short-term interest rates remains on hold for now. For the year, the tech-heavy NASDAQ index leads the major indices I follow. Noticeably, smaller capitalization stocks (Russell 2000 index) are holding their own this year after a disappointing performance in 2014.

The top three economic sectors for the year are Health Care (+6.1%), Materials (+5.9%), and Telecommunications (+4.7%) while the bottom three performers are Utilities (-2.9%), Financials (-0.3%), and Energy (+1.6%).

International markets have also rallied in February. Greece certainly is at the forefront of issues facing international markets, but the Russian incursion into Ukraine, and a slowing Chinese economy are also contributing to concerns. Investors appear to be looking beyond these issues for now and overseas markets are strengthening after a poor 2014. Europe-heavy STOXX 600 index leads among all the broad international indices with most European markets up in the 10% to 15% range so far this year. China is flat, Japan is up 5.1%, and India is up 6.3%.

US interest rates continue to rise. The benchmark 10-year US Treasury bond yield has added 43.6 basis points (a basis point is the interest rate equivalent of a penny to a dollar) since the start of February closing Friday at 2.119%. As you can see from the chart below, this is a very significant increase in rates over a relative short period.

The roller coaster move in rates in January (-49 basis points) followed by a 44 basis point jump in February is in part, I believe, driven by investor uncertainty over EU/Greece concerns and timing of US Federal Reserve rate hikes. Fears of a Greek departure from the EU drove investors into US Treasuries creating demand. The more demand there is for anything, the higher the price buyers are willing to pay. In the case of bonds, this demand/price increase pushes yields on bonds down. When negotiations got under way in Europe with the newly elected Greek government officials, bond investors’ sentiment improved lessening the demand for US Treasuries and yields have risen as prices have fallen. Additionally, many bond investors believe the US Federal Reserve will raise short-term rates later in 2015 (mid-summer or early fall) and rates are moving upwards in response. Where interest rates are ultimately headed is still a huge unknown (as it generally is) and how this sorts out will be determined by how my big four economic themes unfold (Greece/EU, US Federal Reserve rate increases, Geopolitical uncertainty, and Domestic political uncertainty) as the year progresses.

One of the immediate effects of higher interest rates has been the decline in the Utility and Real Estate Sectors. Over the past 30 days, the Utility sector has dropped 6.8% while the Real Estate sector has declined 2.3%. Both the Utility and Real Estate sectors are interest rate sensitive, and I believe they will suffer additional pullbacks if rates continue to rise. It is very, very difficult to say how far rates will climb due to the many cross currents influencing bond investors and I would encourage bond investors not to overreact to the current rate jump at this time. Bond markets are too choppy and I believe it is premature to make major adjustments to bond portfolios.

Commodities weakness continues driven in part by falling oil prices. The Dow Jones UBS Commodity Futures index is down 1.5% in 2015 after losing over 17% in 2014. WTI Oil prices fell 9.4% in January, gained 9.4% over the first two weeks in February only to give back 4.6% last week. The net result is that WTI Oil closed Friday at $50.34 per barrel and is down 5.5% so far this year. Oil needs to find a degree of price stability, and the past few weeks may have been the start of a bottoming process. However, as long as supplies continue building (US inventories were up 7.7 million barrels last week), I believe oil prices may continue to come under pressure. Heating Oil prices are the one exception with heavy demand this winter pushing prices for heating oil up over 16% this year.

The US Dollar has found some stability recently among the other key currencies in the world. The US Dollar index is down 0.6% in February after rising 5% in January and 12.8% in 2014. The cooling of the Greek crisis calmed Euro traders. The Euro has gained 0.8% against the US Dollar this month after falling 6.7% in January. While currency stories do not typically lead the news cycle, a global competition is developing between central bankers as they try to push down the value of their currencies to spur exports. The US Federal Reserve, in my opinion, has been held back from raising rates partly due to the European Central Bank’s announcement that it would begin purchasing bonds (quantitative easing--QE) in March. This European version of QE is widely anticipated to put downward pressure on the Euro. February’s moves aside, I believe the US Dollar is likely to move higher relative to other key currencies in the months ahead. If this happens, US exports will be more expensive (bad for US manufacturers), imports cheaper (good for US consumers), commodity prices may continue to drift downward, and investments abroad will face a currency headwind putting a drag on returns.


THE GREEK CONUNDRUM

The Greek problem for the EU and investors is not going away; it has simply been pushed back four months.

The far-left party, Syriza (Syriza is an abbreviation in Greek for Coalition of the Radical Left), has been forced to accept for now, that they must negotiate with Greece’s creditors to find a way out of the economic mess the country is in. Recall that Syriza’s Prime Minister, Alexis Tsipras, was elected on the promise that he would not negotiate with Greece’s creditors and demand an end to the austerity programs the previous Greek government was required to implement in order to secure additional loans to keep the country afloat. The four-month extension agreed to Friday by Greece calls for the Tsipras to provide, by Monday (February 23rd), a list of economic and policy reforms that will satisfy Greece’s lenders. This extension agreement does allow Tsipras to set his own priorities, but it does not fundamentally alter the situation. Greece must make meaningful progress to grow their economy, collect taxes, slash bureaucracies, and ultimately repay all the money they have borrowed if the country wants to remain in the European Union. To me, unless Tsipras adopts solid, growth-oriented policies, he will accomplish nothing. Quoting one of my favorite clichés, all this talking will be like rearranging the deck chairs on the Titanic.

My optimism about Greece is subdued because Tsipras is a radical left-wing politician, a former member of the Greek Communist Party, and his ideological beliefs do not conform with the actions he must implement to put Greece on a solid economic footing. His coalition partner in Greece is the far right wing nationalistic Independent Greeks party that equally hates the austerity measures imposed by the Europeans and who want to leave the EU. Tsipras and his allies must find a way to overcome their internal biases and come up with a solution that satisfies the EU, their own electorate, and actually reforms the economy. This is a tall order for any group of politicians, right, left, or in-between.

I want remind everyone that the European Union has much to lose as well if Greece fails. The turmoil created by Greece’s departure is more political than economic. The latest economic data I have on Greece’s GDP is that this country of just over 11 million people produced about $249 billion in economic output in 2014 (Source: Global Finance Magazine, Stanford University). For comparison purposes, this ranks Greece between Oregon (25th) and Louisiana (24th) in economic output, and the Commonwealth of Virginia (11th) is producing 1.9 times more economically than Greece.

For the EU, the stability of the union is paramount, and a Greek exit from the EU could open the door to other weaker nations like Portugal, Ireland, and even Italy to follow. A shared currency has benefits to all participants, however, it can only happen if each country surrenders some of their sovereignty to a higher power (the EU and ECB) to maintain order. I believe both sides, after political grandstanding and brinksmanship, will give a little and an agreement reached to keep Greece in the EU for now. This has been the way before and I expect it to continue.

LOOKING AHEAD

There have been no changes to my macro view of the markets. US equities and Bonds are the preferred major asset categories followed by International stocks, Money market funds, Currencies, and Commodities. As I noted before, rising interest rates has already had an impact on the Utility and Real Estate sectors and I will be watching rates very closely in the coming weeks to see if this trend will continue hurting these two strong sectors. I prefer the floating rate and high-yield bond sectors and caution investors about any longer-term maturity bonds.

Looking ahead to key US economic events/reports, Fed Chair Janet Yellen will be speaking to Congress on Tuesday and Wedensday mornings. Her comments always attract the interest of investors. Additionally, housing data will be out (slight decreases expected over December data), and the second estimate of the 4th quarter Gross Domestic Product (GDP) will be released this Friday morning. The first estimate disappointed investors dropping from a consensus growth of 3.2% to 2.6%. The consensus anticipates a further revison downward to 2.1%. Anything below 2% would be problematic in my mind.

If you have any questions or comments, please do not hesitate to 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 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
February 8, 2015


Most equity markets reversed their January losses during the first week in February and are now essentially flat after five trading weeks in 2015.

European markets (STOXX 600) continued to rally as the European Central Bank (ECB) embarks on its own version of quantitative easing (QE).

US markets rallied last week primarily upon consistent economic data and strong job growth numbers. On Friday morning, the Bureau of Labor Statistics (BLS) announced that job growth in January grew by 257,000 jobs and revised previous reports upwards as well. According to the BLS, the US has created over 1 million new jobs since November by far the best increase over a three-month period in years. The unemployment rate, however, ticked up from 5.6% to 5.7% due to a jump in the number of formerly unemployed people re-entering the work force. Not everyone is impressed by the jobs numbers including Gallup chairman, Jim Clifton, who wrote an editorial on the Gallup website arguing that the unemployment rate is extremely misleading and under-reports how many people are either unemployed or severely under-employed. He cited his company’s own statistics that report only 44% of Americans 18+ work at least 30 hours per week and receive a regular paycheck. He blames the government’s methodology of not counting those who have not looked for a job in the past 30 days and those severely under-employed as not being in the workforce for making the numbers appear far more bullish than what is really going on in the job market. He may be right, but there is no denying that jobs growth continues.

I believe the biggest story last week was the surge in interest rates. The US Treasury 10-year yield jumped 25.6 basis points (a basis point is 0.01% of a percent, like a penny to the dollar) to close Friday at 1.94%. This was the largest increase since June 2013. The catalyst for the yield increase was the jobs report and its possible impact on Federal Reserve monetary policy (more on that in a moment). Interest rate sensitive sectors like Real Estate (-1.6%) and Utilities (-3.4%) suffered pullbacks as the rest of the major sectors rallied.

Oil rallied both at home and abroad. WTI Oil closed Friday at $51.69 up 13.4% in the past two weeks. A union walkout at several US refineries and a report showing a significant curtailment in operating oil rigs in the US have led investors to reduce anticipated production of crude oil in the coming months. Market Watch reports that US rigs in operation fell 24% since early December and total producing rigs are at their lowest level in five years. This is consistent with my belief that oil producers will make adjustments to bring supply in line with demand. It is the natural ebb and flow of commodity production. Natural gas prices have continued to fall and are now down more than 13% since the start of the year and down over 38% since the start of 2014.

Strength in the US Dollar continues to gather steam as many countries and regions (like the European Union (EU)) are embarking on some variation of QE to help weaken their currencies and improve their competitive edge among other nations. Growing fears of a turbulent falling out with Greece and the EU also contributed to the overall demand for the US Dollar by Europeans. For the year, the US Dollar Index is up 4.5% adding to the gain of 12.8% in 2014. A stronger US Dollar coupled with rising interest rates hurt gold prices pushing the precious metal down 3.5% for the week and cutting the year-to-date gain nearly in half.

THE FEDERAL RESERVE

In my last Market Update and Commentary, I laid out four important issues facing investors in 2015 that could have a real impact on how markets move during the year. Those issues are Greece and the EU, the Federal Reserve’s monetary policy actions, geopolitical uncertainty, and domestic political uncertainty. I want to spend a little more time today looking at the Federal Reserve.

The Fed has kept short-term interest rates in a range between 0% and 0.25% since late 2008. Everything about this policy is unprecedented. The Federal Reserve’s website states it lowered interest rates (and engaged in QE) “in response to the financial crisis to help stabilize the U.S. economy and financial system.” QE has ended but the federal funds rate still remains near zero.

There is little consensus among economists and financial experts about the effectiveness of these actions, and I am not going to debate whether this policy move and duration was proper. What I am interested in is what’s next and what impact will a rate increase have on the markets?

I believe that the Fed will raise the federal funds rate (the rate at which banks lend money held on deposit with the Federal Reserve to other banks) sometime in 2015. Following the January jobs report and continued positive economic reports, consensus now expects the Fed to announce a rate increase of 0.25% on June 17th after the June meeting. Fed Chair Janet Yellen is widely expected to signal this June hike following the March meeting on March 18th. What impact this will have on markets depends a great deal on how you view what happened to the liquidity created by the Fed resulting from its bond purchases and low interest rates.

I have found that there are generally two schools of thought regarding the impact of QE on the stock markets. One is that the liquidity created by the Fed flowed directly through to the stock market, and that the highs made by the stock market over the past couple of years is a result of this liquidity and not by productivity and economic activity. If you believe this, and many do, then you should expect a major market selloff beginning when the Fed signals a rate increase and building until the actual announcement. If you believe, like I do, that the vast majority of the liquidity created by QE went directly on deposit with the Fed as banks and their depositors demanded safety above all else, then you will see the rise in rates as an overall positive to the markets. I support this latter view because inflation has not materialized, the money supply remains on a normal trajectory, and business lending remained subdued during most of this low interest rate period. I will point out that according to the Federal Reserve, commercial lending has jumped 13.7% over the past year and has accelerating to an annualized rate of 15.1% over the past three months. Money is moving into the economy and the demand for safe assets is dropping which will force the Fed to move sooner rather than later.

I believe that those who feel like the markets are at an artificial high will sell into the news and will create some initial downward pressure on the markets. However, I further believe this will be temporary and the markets, all else being equal, will continue to improve as the economy continues to grow.

The Federal Reserve does not act in a vacuum. With the ECB and a number of other countries embarking on their own versions of QE, there is pressure for the Fed not to act out-of-step with the rest of the world. This is a real consideration for delaying any rate hikes, however, I do not believe the Fed can ignore the economic data here and let the money supply and inflation get out of hand. If the Fed does move forward in the face of QE abroad, I believe the US Dollar will continue to gain against other currencies, and I believe that gold prices will fall.

Those of you that follow my writing know that I do not generally try to make predictions because it is so hard to do correctly on a consistent basis. I am making an exception here because I believe this issue is so important that I feel compelled to provide a foundation of knowledge and understanding on this topic as we move towards this extremely important policy change.


LOOKING AHEAD

There have been no changes to my macro view of the markets. US equities and Bonds are the preferred major asset categories followed by International stocks, Money market funds, Currencies, and Commodities. As I noted before, rising interest rates has already had an impact on the Utility and Real Estate sectors and I will be watching rates very closely in the coming weeks to see if this trend will continue hurting these two strong sectors.

Even though bonds remain in the #2 ranked position of the major asset categories, it has been a tough time for bond investors. With the jump in interest rates last week, the Barclays US Aggregate Bond index fell 1.2%. This is the largest single week drop since late June 2013 when the Barclays fell 1.9%. Particularly hard hit were longer duration bonds which have performed so well as rates have fallen. I continue to like the high-yield, bank loan, and multi-sector bond sectors going into 2015.

There is minimal economic reporting due next week and markets will be closed the following Monday (February 16th) for President’s Day. Later the following week there will be reporting on housing, prices, and the release of the detailed minutes of the Fed’s January meeting. The every Thursday Jobless Claims report is always important as an indicator of how the Fed may act with regards to rate increases, so keep an eye on those reports.

Beyond the US, I will continue to watch Greece’s efforts to get free money out of the rest of the EU. The Germans who have given the most money to Greece till now do not seem particularly inclined to give away anymore of their money. Pressure will be mounting on both sides to get some kind of deal done following the elections because the Greeks are likely to run out of money to pay their bills within the next couple of months. How this situation is handled will, in my view, have significant repercussions on the EU and possibly our markets here at home.

If you have any questions or comments, please do not hesitate to 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 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 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.