Market Commentary by: James Investment Research

Stock Market Analysis from the week of 3/17/12 to 3/23/12

Conclusions: The markets were down on the week as the S&P 500 index fell 0.24% and small cap stocks declined 0.63%. Commodity based sectors fell the most as both the basic materials and energy sectors were down 1.9%. Defensive sectors such as consumer non-cyclical and utilities were the two sectors that were able to advance on the week. Volume was light averaging only 670 million shares a day.

The Philadelphia FED numbers were encouraging as the index rose for the month of March. Still, the report also indicated a change in pattern for some companies as there was a large reduction in the average hours worked. The past several months have been promising for the job market as more workers are finding jobs. The four week average for initial jobless claims continued to decline and is now at its lowest level since the spring of 2008; a promising sign. However, the FED report suggests that many companies are shifting their jobs from full time status to part time and workers are receiving fewer and fewer hours. This is disheartening for full-time job seekers who will likely get less employee benefits as they accept more part-time jobs.

The recovery in the housing market carries on as starts and building permits continue to reach 3 year highs. Interested buyers are also on the rise. Traffic for prospective buyers rose again this past month to 35; near the highest levels since 2006. Historically, when the index rises above 30 it is often very favorable for home prices as they generally rise as much as 5% or more over the next 12 months. This could also offer some investment opportunities in homebuilding companies as well as in housing related industries such as home appliances and furniture stores.

There has been a lot of talk recently regarding the impact of the sequestration cuts and the impact it will have on our economy. At James Investment Research, Inc. we like to do our own research and this week we will be releasing one of our newest white papers, “Sequestration Follies.” This will be available at our website www.jir-inc.com . There is one piece of information in the study that stock investors might find interesting. In our research we found a surprising development: in the years following government spending cuts stocks investors generally enjoyed strong returns. Negatives abound now, it is encouraging that this factor points to at least a possibility of a good year for stocks.

Our long term indicators remain favorable while our intermediate stock indicators have deteriorated slightly but remain in the neutral camp. The very best buying opportunities are generally past but the data suggests it is too early to consider wholesale selling. If you are above target in equity allocations this might be a good opportunity to trim those stocks that are no longer bargains. Otherwise we would recommend maintaining equities at current levels.

Trent Dysert
Assistant Portfolio Manager

Bond Market Analysis from the week of 3/17/12 to 3/23/12

Conclusions: It was a good time to own high quality bonds like Treasuries. For the second consecutive week yields fell for longer dated maturities like the 10 and 30 Year Treasuries. Lower quality bonds, like high-yield issues, tended to underperform.

Most of Wall Street remains in disbelief. The Investment News, a leading financial periodical, recently featured a cover picture of bond certificates wrapped up like dynamite. The cover asks, “What will your clients’ portfolios look like when the bond bomb goes off?” The consensus de jour is Treasuries are in a “bubble” and that major losses are just around the corner.

Funny thing about investment bubbles is their trademark is headlines singing hosannas “This time is different!” Squeals of doom “There is a bubble forming” are rarely heard. Indeed, the cries of doom may instead be a sign of opportunity.

To be sure there are legitimate concerns. Some economic reports, such as the leading economic indicators and regional Fed reports, suggest an improving economy. A peculiarity of bonds is they generally prefer poor economic times.

However an improving economy does not necessarily equate to a healthy economy. Years after the end of the “Great Recession” we find Industrial Production still has not reached its old levels. Small business owners, according to the National Federation of Independent Businesses (NFIB), are highly pessimistic on the general business conditions. The recent Philadelphia Fed survey, while generally encouraging, showed a disquieting trend for workers to put in fewer hours. This is likely in direct response to the new healthcare law which penalizes corporations for having full-time employees. Regardless, regulations from Washington have continued their path of excessive regulations. Some regulations are needed but, as the famed economist Milton Friedman once quipped, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”

Other factors stand in favor of bonds. The crisis in Cyprus is boiling to a head. The country needs a bailout valued at approximately the annual output of their entire country. Financial leaders in Europe are only willing to respond with a portion of the needed money and have an ultimatum for a response by Monday. There appear to be growing prospects that the government will raid bank savings accounts to make up the difference. But if it can happen in Cyprus investors in other troubled nations like Spain and Italy may look to move assets to the relative safety of US Treasury bonds. Our white paper, entitled “Cyprus Crises Aftershock”, highlights the situation in more detail along with its potential ramifications. It is available on our website at JIR-INC.com for free viewing.

Finally, we note our bond indicators are improving and remain in the favorable camp. The vitriolic attitude towards bonds by Wall Street suggests opportunities ahead for bond holders.

David W. James, CFA