December 2011 Newsletter

The Market:

The S&P 500 index opened November at 1218, and closed the month at 1238 for a 1.6% gain. While that's pretty anemic, it is to the positive side and there was some interesting activity during the month. The S&P crested for November on the 8th at 1275 and then dropped to bottom for the month on the 25th at 1158.

Mutual Fund Money Flow

Looking at the most recent mutual fund money flow numbers, for October, we see the following:

	September	October	Comment
Stock Funds Overall	Outflow = 2.11 B	Outflow = 20.43 B	Slowing outflow
Invested overseas	Inflow = 1.57 B	Outflow = 2.42 B	Reversal
Invested in the US	Outflow = 14.39 B	Outflow = 18.01 B	Slowing outflow
Bond Funds	Inflow = 9.50 B	Inflow = 11.41 B	Reversal
Money Market Funds	Outflow = 10.81 B	Outflow = 22.5 B	Reversal

 

Money continued to flow out of stock funds in October at a slightly accelerated rate for money invested in US stock with a reversal from inflow to outflow for money invested in overseas stocks. Bond funds got a boost from 9.50 to 11.41 Billion which represents a 20.1 % increase. Money Market funds outflow jumped by 108% from 10.81 to 22.5 Billion.

Investors aren't that fond of stocks EITHER in the US or Europe, and who can blame them since there continue to be major national financial problems everywhere! It makes sense that money would be flowing into bonds if investors are nervous, but it could be that the significant increase in outflow from Money Market funds means some investors are ready to put their money to work.

PWA

In a somewhat blah month for the S&P, our PWA chart gave one sell and one buy signal. On the 8th with the price at 1275 (the crest for the month) the MACD flattened on the sell side. Three weeks later we got a buy signal when the MACD flattened on the buy side with the price at 1192.

New Symbols:

We have two new symbols this month:

• (USO) United States Oil, an ETF focused on matching the price performance of the spot price for West Texas Intermediate "light, sweet" crude oil. It falls in the Energy Commodities Fund category.
• Also added to our list is (FCG) First Trust ISE-REVERE Natural Gas Index, and ETF that looks to match the index of the same name.

Take a look at the PWA one year charts for these funds. They moves quite a bit and might just provide some trading opportunity for you.

A PWA Alert:

I want to point out to you a second "alert" that the PWA chart shows a fair share of the time, but not always. The first alert is when the price line enters either a buy or sell band. The second alert has to do with the depth to which the price penetrates the zone. In the S&P chart below you'll notice that the price line tended to go about the same depth into the buy and sell bands for each short rally. Now, this doesn't happen all the time, but when it does it's an alert for you to pay close attention because a decision may need to be made soon.

Sometimes, as in the Amazon chart below, the price either rises or falls far into the buy or sell bands. When that happens, you may decide to act even in the absence of a MACD flattening or converging. It's a judgment thing, and on the sell side at least, to act or not will have to do with whether you have a profit in hand, and whether or not you're happy with that profit. On the buy side, just remember to set the stop loss line in the event the price continues to fall.

So practice checking the past couple of short rallies for depth of penetration and use it as an alert. As I implied, this condition doesn't always come about because sometimes the buy / sell opportunities are very short.

Stars and Dogs:

Yep. We've got some stars and some dogs again this month even though it was sort of a strange month. Most of the stocks made some moves during the month but ended it about where they began. However, we had a couple of serious dogs, so let's start with those.

Dogs:

• The most vicious of dogs was (RMBS) Rambus, Inc. a company that holds and licenses patents particularly related to the cell phone industry. The company holds something like 1,000 patents and derives income primarily from defending those patents in court, so they employ lots of lawyers. The latest was an antitrust suit against Micron and Hynix which Rambus lost, and as a consequence their stock dropped like the proverbial rock, losing 55.6% during November. Now THAT'S a serious dog! The concern among investors seems to be that the company has a limited stream of income aside from successful law suits which tends to rack up massive legal costs. So when you lose one, it REALLY hurts the bottom line.
• Our second place dog was the otherwise mild mannered (FRO) Fronline, Ltd, oil and bulk shipping. They managed to lose 35%.
• And in third we have (RIG) Transocean Sedco, off shore oil rigs and services. RIG dropped 23.7% in value, so it wasn't a good month for oil production companies and companies that don't produce anything but lawsuits.

Stars:

• While our stars were a little on the retiring side, (RGLD) Royal Gold did a pretty good job for investors coming in at a positive 11.1% for November.
• (EZPW) Pawn shops, produced a plus 10.9% which is almost as good.
• And running close third was (AUY) Yamana Gold returning a nice 10.8% gain.

 

Recession Watch:

On the recession front not much has changed.

• Freight moving tonnage was up 2.0% for October (latest available.).
• Housing default numbers were up slightly again last month..
• Non-farm employment is up slightly but nearly flat and the overall unemployment number has dropped just below 9.0% for the first time in a while.
• Then there are also a number of pundits and economists who say we're headed for recession (again) in the first two quarters of 2012. But then, economists are sort of like weather men; permission to be wrong half the time is in their job descriptions.

Last month we looked at a graph of the U6 unemployment rate, which was not good at 16.2%, so this month I'm including the table for the last12 years less one month. We have not been doing well in the last three years with the peak occurring in October 2009 at 17.4%; and, we haven't moved a lot from that rate in spite of the efforts of our federal government to infuse money into the economy.

I still maintain that in spite of a better stock market and a few other positives we still haven't recovered from the first recession. So should the economists be right this time, it's more of an extension of the old rather than a new recession.

We have not done well in the last three years, as the table below shows, and we won't until the unemployment numbers start coming down.

Unemployment Rate - U6

2000-2011

What is U6 unemployment rate?

The U6 unemployment rate counts not only people without work seeking full-time employment (the more familiar U-3 rate), but also counts "marginally attached workers and those working part-time for economic reasons." Note that some of these part-time workers counted as employed by U-3 could be working as little as an hour a week. And the "marginally attached workers" include those who have gotten discouraged and stopped looking, but still want to work. The age considered for this calculation is 16 years and over.

Inflation Watch

Checking on the list of commodities we've been following we see the inflation rates for each area falling, with the overall average of this group reduced by 7.40%. In the 12 month column we see the year over year rates dropping as well, al of which is good. We're still in "stagflation" conditions, but that can change quickly if the inflation rates continue coming down.

Commodity Price Change

Commodity	Previous 1 month % change	Most recent 1 month %	Previous 12 month % change	Most recent 12 month % change
Fuel (energy) Index	0.44	- 0.56	33.77	25.10
Food Price Index	-3.27	- 5.60	12.59	1.41
Metals Price Index	-3.75	- 10.35	10.81	- 7.11
Corn	-4.52	- 7.24	43.95	15.61
Wheat	-3.41	- 8.52	16.25	16.61
Beef	-1.75	- 0.94	16.51	12.62
Copper	-7.76	- 10.91	7.38	- 10.80
Iron Ore	-0.12	-15.12	26.03	1.31
Overall, this group	-3.01	-7.40	20.91	6.84

 

Opinion

My opinion this month is that the guy below should replace his windmill with a Santa cap...........or maybe a small Christmas tree.

Final Word:

May the coming Christmas and New Year season bring you great joy!

Wishing you well,

Arley Loeffler, CEO
Investment Timing Software, LLC
arley@itspage.com