April 2011 Newsletter

The Market:

For the month of March the S&P 500 Index continued to creep up a little more. The month opened with the S&P at 1306 and gained 1.4% by the 31st. There was a mid month dip to 1256 on March 16 after which the market climbed to end at 1325.

Reviewing the most recent mutual funds money flow information (for February) we find that:

• Long term equity and bond funds had a net inflow of 26.57 billion, a 2.18 billion increase over January.
• Among US funds invested primarily overseas, there was an inflow of 3.71 billion, down 4.55 billion from January.
• For funds that invest primarily in the US there was an inflow of 9.26 billion compared to 11 billion the previous month.
• Bonds inflow increased from 1.81 billion to 7.67 billion.
• Municipal bond funds outflow dropped from 12.40 billion to 4.32 billion.
• Money Market funds reversed course showing an inflow of 12.02 billion vs. an outflow of 75.61 billion in January.

 

So, February saw a continued flow of money out of Municipal bonds into equities and a reversal of money previously leaving Money Market funds in huge amounts. That would seem to indicate investors are putting their money to work in the markets, which is a good thing overall. Further, this would seem to indicate there is a higher level of confidence that investing in the US makes good sense.

PWA

The PWA 500 Timer chart started the month in a sell band, reached a high of 1330 on March 3rd, fell into the neutral band on the 10th without pulling back far enough to trigger a buy signal, and then recovered, returning to the sell band.

The Online Analyzer S&P chart with default settings dropped into the dark green buy band on March 16th at 1256 starting a three day buying opportunity and spent the rest of the month in the white neutral band.

Stars and Dogs:

In contrast to last month when all the best performers were precious metal stocks, none appear in our Star Watch this month; but, stars we do have as well as dogs.

Stars:

• (TRN) Trinity Industries, construction materials and rail shipping equipment, showed the best return for March coming in with a 22.2% gain.
• (HK) Petrohawk Energy, natural gas, did very well also bringing home 18.8%.
• (DFS) Discovery Financial, the credit card company, returned a very nice 14.2%.

 

Dogs:

We have some new names appearing in the dog ranks that have not shown as either strong or weak for many months.

• (CCJ) Cameco Corp, a Canadian uranium mining, and processing company, and nuclear energy producer, crashed 25.8% following the nuclear plant debacle in Japan.
• Canada, tripped for the month returning a negative 14.8%.
• Finally, (CFFN) Capitol Federal Finance, a Kansas banking company, stubbed its toe with a 10.1% loss in share value.

 

All the dogs are currently in a PWA buy band, but with respect to CCJ, I would want the metaphoric dust to settle for a while before purchasing. The price may continue to drift down since the Japanese situation has given nuclear energy a black eye.

As an aside, it's probably not a good idea to build nuclear plants near earthquake fault lines; but then the entire country of Japan is subject to frequent earthquakes. It's also worth noting that in California there are at least two nuclear plants on the coast near major fault lines, built where they are for access to ocean water for use in cooling.

Recession Watch:

In spite of what our government would have you believe, we aren't out of the recessionary woods yet.

• Realtytrac reports 261,333 foreclosures for February which is down 13.86% from January, and that's a good thing. At the same time prices on foreclosures fell 1.73% to a $168,873 average; which is good for buyers but not so hot for sellers.
• In the well saturated commercial real estate market, prices continue to fall and are down 1.2% from January and down 42% from the high in 2007.
• Housing starts fell 22.5% in February after an 18% jump the month before. Some experts are predicting a "double dip" recession in the housing sector. We'll have to wait and see.
• In the jobs market, initial jobless clams continue to drift down, although as I've said before that has to do with "initial" claims and doesn't account for people who have exhausted their benefits and have stopped looking for work. Still, we like this number to continue down.

Inflation Watch

The Producer Price Index (PPI) measures prices at the wholesale level and was once titled "Wholesale Price Index." The PPI is a leading indicator of future inflationary pressure and is predictive of which direction the Consumer Price Index (CPI) is headed... The graph of the PPI shows a big jump, 1.6% in one month compared to the predicted 0.6% that was anticipated.

Turing to our table of selected commodities, we get a big clue as to why the PPI is up so much. For the month, the items we follow continue to increase in price other than beef which dropped a tiny bit. For this whole package of commodities, the year over year (YOY) increase is 48.54% compared to the same calculation of 47.08% last month. We'll have to monitor that to see whether inflation is accelerating or not.

Jumps in producer prices and commodities take a few months to reach the retail level, but you can look forward (unhappily) to higher prices in the near term and medium term.

Commodity Prices

Commodity	One month Change	Twelve Month Change
Fuel (energy) Index	4.50	29.73
Food Price Index	5.33	39.19
Metals Price Index	4.38	39.80
Corn	10.60	81.53
Wheat	6.61	78.96
Beef	-1.05	29.58
Copper	3.65	43.88
Iron Ore	4.20	45.67

 

Opinion

I've been expecting a market pull back of ten or fifteen percent for a number of months now, but it hasn't happened yet partly due to the Federal Reserve "quantitative easing" policy which has served to prop the market in the face of either good or bad news. Looking forward, we may get a market bump until mid April as people fill out their 2010 401k contributions.

Then the next major action to watch is whether or not the Federal Reserve embarks on QE3. If they do, that should mean a bump up for the market. If they don't then the market is sort of "on its own" without props and that might result in a market correction.

We'll see.

Other PWA News:

There's nothing startling in the way of PWA news this month, but there are a few improvements in the works for the future. I'll tell you about those another time.

Final Word:

Now here's a model NOT TO FOLLOW as you think about retirement.

Wishing you well,

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