March 2011 Newsletter

The Market:

In February the market as measured by the S&P 500 Index continued inching upward, seemingly not influenced by good news or bad, on low volume. Maybe that's because institutional investors aren't doing much more than sampling the market with a toe---being hesitant to stick a foot in what with all the uncertainty from the White House, Congress, energy prices, and the exceedingly active Federal Reserve money printing presses. So, the smaller investor constituency seems to be most active in the market.

The S&P opened February at 1307 and timidly tip toed to 1327 at the end of the month for a tiny 1.5% gain. There was, however, a better increase with a February 18 close at 1343 followed by a pull back to 1327.

Reviewing money flow information for January (most recent available), we find that:

• Long term equity and bond funds had a net inflow of 24 billion compared to an outflow of 17.27 billion in December.
• Among US funds invested primarily overseas, there was an inflow of 8.25 billion against an inflow of 13.81 billion in December.
• For funds that invest primarily in the US there was a reversal, an inflow of 11.26 billion compared to an outflow of 12.88 billion for December.
• Bonds also show a reversal with an inflow of 1.81 billion vs. and outflow of 19.98 billion the previous month.
• Municipal bond funds experienced an outflow of 12.40 billion, a slight decrease when compared to December.
• Money Market funds outflow accelerated very significantly from 9.45 billion in December to 75.63 billion in January.

 

In short, money is being pulled from Money Market funds (thought to be a safe parking place for money) at a rapid rate and put to work in equities with some beginning to go back into bonds. Perhaps investors are feeling more hopeful about our economy and the markets.

Also, Ben Bernanke and the Fed printing money like we're about to run out of the stuff serves to lift the market a bit for now though it will have more serious negative consequences for all of us later in the form of inflationary pressures.

PWA

The PWA 500 Timer chart spent the entire month of February in the dark red sell band, so the selling opportunity continues and it's an extended one. That said, and assuming a good buy in level, we can wait a bit. One key a person might consider is holding until the chart shows a converging MACD or waiting until the price line exits the sell bands and moves into the neutral zone.

For the PWA Online Analyzer S&P chart, the price entered a sell band on February 1^st at 1307, dipped out for one day on February 15^th, rose to 1343 on the 18^th and then dropped into the neutral band. The MACD turned flat on February 11 with the price at 1329.

Stars and Dogs:

Ok, let's see which companies did well for us in February, and which ones didn't.

Stars:

• Our old friend Silver Wheaton (SLW), a silver streaming company, posted a gain of 23.5 % which isn't too shabby given the timidity of the market as a whole. SLW is a company with long term contracts to buy silver from certain mining concerns at fixed prices but does not mine the metal so it doesn't incur much overhead expense.
• Silver Corp Metals (SVM) is a mining company with operations in Canada and China. SVM returned a sparkling 18.4% for the month.
• Goldcorp, Inc (GG) a company mining gold and other metals, was close behind with a positive 17.1% return.

 

Dogs:

What can you say about dogs that just lie about in the shade nipping at fleas in February? You could understand their doing that in the blistering days of summer..........but February?

• The laziest canine was Akamai Tech (AKAM) internet accelerator service for business, that slept significantly more than the other dogs under the same shade tree and produced a negative 23.5%.
• US Natural Gas Fund (UNG) was a more active puppy with only an 8.6% decrease in value.
• Wal-Mart Stores, Inc (WMT) was the most awake of the three coming in at a minus 7.7%.

 

As I say, dogs do become stars sometimes and all three are currently in the PWA buy bands.

Recession Watch:

The economy is showing some continued positives, anemic as they tend to be in recovery from a deep recession.

• Freight is moving so manufacturing and sales are beginning to turn positive.
• The stock market inches up week by week, partly propped up by the Federal Reserve policy.
• There are some indications that small businesses are beginning to hire, but very slowly at this point. According to some experts in the field, we need to create 150,000 jobs each month. Last month the number was 36,000 which probably doesn't equal the numbers for those who lost jobs.

 

There is a lot of information to show that we still have a long way to go toward recovery.

• Realtytrac reports 367,056 foreclosures last month which is an 8% year over year increase; and, there was a 19% increase from January.
• Commercial real estate delinquencies rose from 9.2% to 9.39%.
• On the jobs front things may be starting to turn, but the picture is far from rosy.

 

The non-farm employment rate has increased a little and the unemployment rate is dropping toward 9.0% as shown on the graph.

Jobless claims have been coming down too.

But to some degree these are all three false readings. What happens is that people who have exhausted their unemployment benefits and people who have stopped looking for work aren't tallied in these numbers. So, while the numbers look a bit better, the real situation may not have changed much. However, if whatever data is used regularly is looking better, we like that.

Inflation Watch

Now let's take a look at the inflation front. We already know the Federal Reserve has been printing money like mad and has also been contemplating QE3 to do more of the same though there is some scuttlebutt that Bernanke is rethinking that plan. I hope so.

To monitor inflation, I'm going to start a table to follow a number of commodities. Commodities are what producers buy to...well....make and produce stuff. So when commodity prices move up significantly, so will everything we use and buy.

There's a whole universe of items from which we can choose. You probably aren't any more interested in DAP fertilizer, Hard logs, or Soft sawn wood than I am so I selected three indexes and five individual items to follow.

• Energy prices influence absolutely everything, so that's important.
• Food is important too since we have to fuel our bodies so we can go to work to earn money with which to pay taxes, and pay taxes, and pay taxes.
• Metals are important because lots of things are made with it.

 

For the individual items I've picked corn, wheat, beef, copper, and iron ore. The last two because these metals are used to make lots of items we use every day. The first three because everybody has to eat--pretty much every day. If any of you are Vegan, you might not be all that fond of beef; but no, we aren't going to track carrots.

Commodity Prices

Commodity	One month Change	Twelve Month Change
Fuel (energy) Index	3.94%	20.35%
Food Price Index	3.62%	32.09%
Metals Price Index	25.86%	57.62%
Corn	5.68%	58.66%
Wheat	6.37%	62.05%
Beef	8.48%	38.65%
Copper	4.16%	29.40%
Iron Ore	-1.30%	77.85%

When these and other basic materials are rising in price, the prices in grocery stores, gas stations, and most other retail locations are going to increase in the future as well.

Opinion

When you compare the current 1.6% Consumer Prince Index Core (which for some unknown reason excludes food and energy) to the long term average inflation rate of about 3.5%, it looks like we're in good shape; and, by that measure maybe we are but probably not for long.

When you look at the broad picture of unsustainable national debt, federal overspending by fifty percent over revenue, the Federal Reserve dramatically increasing the money supply so as to devaluate the dollar and increase inflation, joblessness, and anemic business climate the view isn't nearly as pretty.

It looks to me like we are entering a period of "stagflation," which is to say significant inflation in the face of a stagnant economy.

Let's hope and pray that Ben Bernanke can put the brakes on inflation whenever he chooses as he professes he can do.

Other PWA News:

First of all, for those of you who like to use the PDA Online Analyzer charts (which are three month charts in a larger scale with additional information below when you put the crosshair on a data point) we have added the "favorites" function to those charts.

Also, if you haven't noticed yet, we have posted on our website the ten year back studies for 2001 through 2010. In contrast to the previous studies, these show the MACD status at decision points along with other decision keys and they include the dates such decisions were made.

When you take a look at the studies you'll notice a couple of things.

• First of all you'll see the importance of setting a stop when you buy in to a stock or fund. As I say, the stop doesn't come into play often but using them will prevent major loss of investment value.
• Secondly, you'll notice that with the default settings the MACD flattening (same level two or more days) is the most commonly successful decision key.
• Along similar lines, you'll notice that with the 20 day moving average settings the MACD becomes less useful and a person needs to rely more on intuition and judgment derived from practice. You have to react more quickly and make decisions based simply on whether or not the price is in a buy or sell band because many of the turning points with the short settings are only one or two days long.
• The shorter and tighter settings can be very productive, but I'd recommend you do a lot of paper and pen practice back studies before putting money at risk. You need to do enough of that to feel confident about your judgment.

 

A caveat here is that all these studies were done with S&P 500 Index data. There are any number of individual companies we follow that would perform even better for you.

Final Word:

Maybe we can get our elected Congress persons and State legislators to remember what they learned about math in elementary school.

What are the odds you ask?

Wishing you well,

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