The first quarter of 2011 began with a continuation of many of the external forces influencing our markets that affected them in 2010. There’s an adage on Wall Street that says “the market climbs a wall of worry” and this quarter it appears we climbed that wall pretty well. The Standard & Poor’s 500 advanced 5.9% while the Dow Jones 30 Industrials and the NASDAQ appreciated by 6.4% and 4.8% respectively.

Technical Market Overview

The 200 day moving average of the S&P 500 is a commonly watched indicator of the long-term trend in the domestic equity market. As the name would indicate, the 200 day moving average of the Standard & Poor’s 500 is the average closing price for the past 200 days. Simply put, if today’s average price is greater than yesterday’s average price for the past 200 days then the trend is positive. Conversely, if today’s average price of the past 200 days is lower than the prior day’s average price a new downward trend has now begun. On March 31, 2011 the S&P 500 was 1328.83, some 134.62 points above the 200 day moving average, confirming a well-defined uptrend in the Standard & Poor’s 500. Interestingly, as of December 31, 2010 the Standard & Poor’s 500 finished the year at 1257.64, seemingly 111.40 points above the 200 day moving average at year end. The margin of 134.62 points as of March 31, 2011 is significantly greater than the 111.40 points above the 200 day moving average at the close of last year. This further expansion in the S&P 500′s performance lends further comfort regarding future performance in this broad index. However, it is important to note that as with all market observation tools, there is no assurance that the current market trend will continue.

Unrest in the Middle East

The heightened tension in virtually all Middle Eastern countries served to spike oil prices to levels not seen since mid 2008. With what now appears to be a destabilization of the whole Middle Eastern region, oil continues to move even higher. As we enter the peak driving season this summer, many economists fear that the significantly higher gasoline prices will have a dampening effect on our economic recovery.

Unfortunately, higher gasoline prices have virtually the same economic effect as higher taxes, causing significant economic pressure on all citizens. For every cent per gallon gasoline prices increase, it takes approximately $1.3 billion out of consumers discretionary spending. If oil remains above $100 per barrel it’s quite possible to see $4.00-$5.00 per gallon gasoline prices by Memorial Day. In addition, this would have a devastating effect on summer travel and the entire vacation industry. The impact of higher fuel costs is seen in not only gasoline and diesel fuel costs but in such staples as food, fertilizer and virtually all plastic and rubber in electronics products. These higher energy prices combined with their rippling effect historically have created significant inflationary pressures on the economy. The Federal Reserve Board has been reluctant to increase interest rates in anticipation of these inflationary pressures based on a stubbornly high unemployment rate along with an unexpectedly slow and lethargic economy. If inflation becomes a more urgent concern, the Federal Reserve Board may be forced to raise its rates in order to manage the inflation particularly after infusing so much capital to the money supply, in an effort to create liquidity and stimulate the economy.

Japan

As our nation reviews our national energy policy and our dependency on foreign oil, Japan experienced what appears to be the most significant nuclear accident since Russia’s melt down in its Chernobyl nuclear power facility. Japan experienced an 8.9-magnitude earthquake off its east coast on March 11 of this year causing a tsunami. The damage resulting from both the earthquake and the ensuing tsunami caused unspeakable damage. Almost total destruction of the Fukushima nuclear power plant was the focus of the international media as well as Japanese government as authorities tried to gain control over the leaking radiation. The extent of the long-term effects of such a disaster are still unknown; however, the most optimistic forecasts indicate this disaster will have far-reaching ramifications both environmentally and economically to Japan as well as the entire industrialized world. Unknown health and economic consequences caused the market(s) to retreat for several days surrounding the tragic news from Japan. The economic consequences to the automotive industry are still being felt and will have an impact for months if not years to come. Interestingly, many pigments used in paint are manufactured in Japan; disruption in supply has caused American automotive manufacturers to stop production on several popular colors. The ramifications of such a disaster are incalculable to virtually every industrialized economy around the world.

Consumer Confidence

Consumer confidence, as measured by the University of Michigan’s CSI Index, declined sharply in March to 67.5 from February’s 77.5 due to rising gas and food prices. While further declines may well occur in the months ahead, consumers do not appear to have adopted the same deep pessimism that was prevalent a few years ago. Nonetheless, the March drop was record setting; it was the 10th largest monthly change ever recorded. It becomes glaringly apparent that the high energy costs mentioned above have an immediate impact on the psyche of the American consumer. If this period of high energy costs persists, the political pressure generated by such a cost will certainly play a major role in the upcoming presidential elections in 2012.

Unemployment

The federal unemployment rate as measured by the U3 has declined from 9.8% at the end of 2010 to 9.2% as of March 31, 2011. This reduction in the federal unemployment rate is a welcome sign that our economy has begun its long-awaited recovery. The broader and more accurate measurement of unemployment, the U-6 is at 16.2% down from 17%. The U-6 is the total unemployed which means the 9.2% mentioned above, plus the total persons employed part-time for economic reasons as a percent of the civilian labor force, plus all persons marginally attached to the labor force. The reduction in the unemployment rate is a positive and much needed component to getting our economy back on track for substantive, sustainable economic growth. These numbers do not indicate whether or not the jobs were created in the public sector or were government jobs, possibly being temporary. One can only hope that these jobs were private sector jobs in industries with long-term sustainable growth prospects.

Federal Deficit

The $14 trillion dollar federal deficit remains arguably the single greatest challenge facing this country in recent history. The inability of politicians to deal with our federal deficit in a substantial way, in our opinion, is the single largest threat to our safety and way of life as we know it. The recent squabble over a $39 billion dollar reduction in the budget for the remainder of this year is an unfortunate example of Washington’s irresponsible conduct as it pertains to our country’s financial solvency. If the US is to maintain its credibility in the financial markets around the world, this issue must be addressed swiftly and with meaningful spending reductions. However, if the leadership of this country is unwilling or unable to do so and our currency is devalued to the extent that we are no longer the world’s benchmark currency, it could have a devastating effect on the world economy. The upcoming budget for 2012 will be a real indication as to the government’s commitment in maintaining our solvency and leadership role in the world financial community.

Risk Managment

Risk management remains a primary focus for portfolio management based on the macroeconomic issues discussed above. Retention of capital and risk mitigation is a key function to having long-term investment success. With the risk factors outlined above, we believe it is wise to manage risk rather than try to achieve returns that require exposure to asset classes with greater volatility. Some exposure can have a damaging effect on the portfolio to the extent that it may take several years to recover.
For these reasons, most of our portfolios have exposure to various types of bonds both corporate and government as well as convertibles and inflation protected bonds. There are no guarantees that portfolio allocations for bonds eliminates risk however, they spread risk over sectors that historically experienced less volatility than equities. We continue to monitor portfolio allocations closely in an effort to identify any investments that may cause undue risk to the portfolio. Additionally, we remain optimistic that as we enter the next political season, there may be several risk appropriate and prevailing options for your portfolios.
Summary

In summary,

the first quarter ended in a productive fashion which helped continue an upward crawl for many of the broad market indexes from the 2009 low. This continuation gives confidence that the economy has continued to remain resilient in the face of multiple economic and political headwinds. Crude Oil prices returning to historical highs will likely have a dampening effect on the economy, while acting as an unbiased tax against all American households. Other economic hurdles remain in Japan’s northern infrastructure and nuclear radiation situation. The effects of the third largest economic power being taken off line for a brief time frame is still too recent to determine the possible economic consequences. Numerous other items of “worry” could be listed, not the least of which is the current US deficit, but the markets continue to consider these hurdles and so far have resumed the slow climb upward. Likewise, we continue to monitor the categories and sectors that could potentially become productive in the second quarter. Many of the models have remained focused on equity positions that have benefited the portfolios in the first quarter. However, we did see some bond positions get picked up which may indicate that the market is getting a bit “toppish” and begin to move in a sideways pattern. We are pleased with the current productivity produced in the portfolios so far and look forward to having the model technology uncover the investment opportunities that may exist in the second quarter of this year.

Contact Us
(330) 467 -3111

vince@thewestermangroup.com

dmillet@thewestermangroup.com

Quotes
“The issues influencing the market are, unrest in the Middle East, Japan, Consumer Confidence, US Unemployment and the Federal Deficit.”
Vince Westerman

“Strength in energy commodities and gold continues however we have been adding more fixed income to each portfolio for the near term”
David Millet

Disclaimer Notice

No investment strategy can guarantee profits or protection from losses as securities are subject to market volatility. The analysis, ratings and/or recommendations made by The Westerman Group, LLC/SuM-it computer models do not provide, imply or otherwise constitute a guarantee of performance. No guarantee is offered by The Westerman Group, LLC regarding the accuracy, market predictive powers, suitability or profitability (either expressed or implied) of any information provided. Indices are unmanaged and direct investments in them are not possible. Actual investment performance of any trading strategy may frequently be materially different than the pursued results.

WESTERMAN GROUP, LLC is a Licensed Investment Advisor Securities offered through Silver Oak Securities, Inc., office of supervisory jurisdiction, 3339 North Highland Avenue, Jackson, TN, 38305 (800) 610-6869 Member FINRA/SIPC

Sources

· Google Finance (for price history of S&P 500 and other indexes)