april 2011 notes

April Notes are offered for information purposes only and do not constitute any offer to buy or sell any securities.

INSIDE THIS ISSUE :

BULL—BEAR 2

MARKET DATA 4

CALENDAR 5

MAJOR MKTS 6

SECTOR PERF 11

F IXED INCOME 14

COMMODITIES 17

Market Trends

Short Term MTI Bearish Intermediate Trend Bullish Long Term Trend Bullish

JOHN LESLIE’S BRIEF MARKET ANALYSIS April 2011

APRIL MARKET NOTES

U.S. Economy and Markets Move Ahead

After a rough start, March

Madness prevailed as the major indexes closed the quarter with

the strongest gains in more than 10 years. The economy contin-ues to show steady improve-

ment with the notable exception of housing. Nonfarm payrolls

came in above expectations at 216,000. The unemployment rate fell again for the fourth

straight month to 8.8%. That’s the lowest level in two years.

These numbers can be a little confusing as fewer workers are reentering the job market sug-

gesting they don’t see much promise of jobs. But the trend

is clearly positive. The manu-facturing sector continued to

show strength as the Institute of Supply Management (ISM) index declined in March to 61.4.

(A reading above 50 indicates expansion, below 42 reces-

sions). Manufactures drew down inventories as all 18 in-dustries reported paying higher

prices. U.S. Consumer Confi-

dence fell slightly in March ac-cording to the Conference Board

as did the Michigan Sentiment index. Housing continues to lag other sectors as Construction

spending fell again in February to the lowest level since 1999.

New Home sales fell 16.9% to the lowest level on record (1963) while sales of existing

homes showed a similar decline (9.6%). But both of these indi-

cators can be quite volatile and

subject to revision.

Global markets rebounded in

March suggesting a continuation

of the global recovery. April and

May are seasonally favorable

months for the equities markets.

There are still clouds on the ho-

rizon, but the market has been

climbing the wall of worry thus

far. Both the Bulls and the

Bears state their case on page

2. And yes, it is Tax Time!

Burke-Leslie Professional Asset Management, LLC. 801 International Parkway Lake Mary, FL 32746

407-562-1861 [email protected] [email protected]


THE BULL AND BEAR STORY

Every time someone buys a stock, someone else is selling it. It’s safe to assume that

what one investor views as an new opportunity, another views as quiet differently. This is what makes an auction market. Viewing the same economic data, analysts and inves-

tors often come to very different conclusions. That’s never more apparent than now when the major market averages have essentially doubled from the March 2009 low.

So where are you, bullish or bearish?

The Bulls view the economic environment as very positive. Af-ter all, interest rates are still very low. The 2 year T-Notes

are yielding only .8%, the 10 year is 3.45% and the 30 year T-

Bond is 4.48%.

The unemployment rate is falling, now 8.8% and the econ-

omy is finally creating new jobs.

The Purchasing Manager’s Index (PMI) points to an expansion

of manufacturing. And retail sales continue to improve.

Corporate earnings are expected to come in strong for 2011. The estimated price earnings ratio (P/E) for stocks are estimated (by Bank of America analysts) to come in

at 14 for 2011 and 13 for 2012. From a historical perspective, the market is not over-

valued.

The Federal Reserve is clearly in an accommodative mood. Even though QE II ends in

June, the FED is committed to economic growth and a higher inflation rate.

The bulls view this data as very encouraging, and believe the stock market has lots of

room to go higher from here. Cash then, is trash.


THE BULL AND BEAR STORY—PART 2

The Bears have a different take on the data. The unem-

ployment trend is down, but the real unemployment rate is much higher than 8.8%. According to the Wall

St. Journal, “There are still 13.5 million people who would like to work, but can’t get a job.” The broader U-6 unemployment rate includes those who are marginally

attached to the labor force. That number continued to

decline but still remains at 15.7%.

They question what will happen when the FED stops

flooding the economy with money (quantitative easing)

in June.

Bears worry about the current political unrest in the Mid-

dle East and North Africa (MENA), the sovereign debt cri-

sis in European Union, and the fallout from the natural disasters in Japan.

They are concerned about the growing federal debt service obligation, and the current

focus on cutting government spending. What will the fallout be on the economy?

They are concerned about the ramifications of the large budget deficits, and the sliding U.S. dollar. If the dollar falls so low that it is no longer the global currency, what hap-

pens to the cost of doing business in the global economy?

Commodity prices continue to climb, in part because of the falling dollar. Will higher

prices be inflationary pushing up the cost of retail goods? Will the FED be forced to raise interest rates? How will the housing market respond to higher interest rates? Is

there a possibility of a double dip in housing prices?

“The Bears acknowledge that Bull markets climb a wall of worry … but today’s wall of worry is one of the highest and most daunting in years” according to Mark Huard. The

Bears conclude that lower prices are around the corner.


Market Data


Economic Calendar

SEASONALITY

For the past 10 years, April has been a sea-sonally favorable month for the Dow Jones

Industrial average. The index has been up almost 67% of the time with an average gain

of 2.1%.

______________________________________________________________________________________


Major Market Indexes

The S&P and DJI indexes remain in bullish

trends, albeit bearish wedge patterns. Last week’s Mid-East turmoil pushed energy prices

higher, and the indexes lower but they did

NOT break below support.

The NASDAQ Composite and Transportation

Indexes have broken below the prior pivot low, so price is below the Trend Bar (black line) and now negative on an intermediate

term. The Transportation companies have been hurt by rising energy and commodity

prices. Both of these indexes, however, re-

main in positive longer term trends.

Given the strong price performance since last August, a pull-back or “correction” would be both expected and healthy. In our opinion,

we have completed two of an anticipated

three wave cyclical bull market.

Given the current geopolitical events, we are

alert to the possibility of increased volatility. However, news does not normal affect the

longer term price trends. Ultimately, price is the best “indicator” and we monitor those

trends daily. Don’t ever panic.



The major indexes traded lower in early March in what appeared to be the beginning of a

correction. But price reversed mid month to rally an impressive 700 Dow points.

The S&P has rallied to within a few points of its bull market high. Seasonality factors favor a

continuation of the positive trend. Momentum indicators are bullish on both daily and weekly time frames. Viewing 10 color coded technical indicators, green for positive/red for negative signals, the index turned bullish the week of September 13th.



The bearish “wedge” pattern broke down in February taking price to the 1250 area. The re-

versal off 1250 created the support trend line. The Index is now in a positive channel with an up-side target above 1400. There is no assurance it will reach that technical target, but

the trend is clear.

The same pattern is manifest in the Dow Jones Industrial Average. The trend line resistance

is in the range of 13000.



Market Breadth Indicators are positive including:

New York Stock Exchange

Advance vs. Declining Issues.

(More stocks are advancing

than are declining.)

New York Stock Exchange

New Highs vs. New Low

(There are many more stocks

making new highs than are

making new lows.)



The New York Stock Exchange Bullish Percent Index records the number of stocks with bull-

ish “point and figure” buy signals. The indicator has confirmed the new bullish trend in Sep-tember, the correction in February, and the resurgence of positive price movement in late

March.

The near term sentiment, momentum, and price patterns are in positive trends. But with the

many unresolved global challenges, it’s important to avoid complacency.

Negative crossing

Positive crossing


SECTOR PERFORMANCE


SECTOR ETFs

Relative strength is a measure of the relationship of price performance between a stock/ETF and another stock/ETF in the same category, against an index or against the broad market. For our Sector ETF analysis, we are measuring strength between the

Sector ETF and the S&P 500.

Robert Colby’s long term relative strength ratings are listed in descending order of

strength:

Energy — Bullish: relative strength further above 2 year highs.

Limited storage issues may push oil futures lower in the near term as trades can-not accept delivery. But the continued instability in MENA (Mid-east, north Af-

rica), the global economic recovery and growing demand point to higher prices

in the intermediate term.

Industrials—Bullish: relative strength back above 12 year highs.

Manufacturing is improving according to the latest ISM data, and growth could

actually be stronger than anticipated. But the overall view is neutral due to fiscal

restraints, Asian monetary policy, and a rollover of the orders/inventory ratio

Materials— Bullish: relative strength rose above 6 week highs

Materials continues to move with the overall market with a positive trend.

Higher commodity prices can put a damper on growth however.

Consumer Discretionary—Neutral: relative strength in trading range.

As we enter the later stages of the economic expansion, this sector become more vulnerable to pricing pressure. With limited pricing power to offset costs, the

sector remains a neutral.

Technology—Bearish: 50 period moving average of relative strength crossed below

the 200 moving average. Absolute price is neutral.

Still recovering from the market correction, an improving economy will boost

tech sales and bottom line. Financials are solid and the sector is rated neutral.

Health Care— Neutral: relative strength back up to neutral

This beaten down group has climbed back into the neutral area. There are still issues with health care reform which could limit profits. But low valuations re-

main attractive.

Financial—Bearish: relative strength fell below three month lows. Absolute price

broke down below 10 week lows.

Housing, the related mortgage market and new capital requirements will create a drag for this sector, while higher interest rates and the ability to begin or in-crease dividends point to stronger performance. Still a market performer, but an

improving sector.

Consumer Staples— Neutral: relative strength neutral but weakening

While traditionally a defensive sector, prices are improving with the economic

recovery. But rising commodity costs are putting a ceiling on margins. The

sector remains a weak neutral rating.


Utilities— Bearish: relative strength fell below prior 2 week. Absolute price is neutral.

While relative performance puts utilities at the lowest range of the sectors, low bond yields and high utility stock dividends have attracted buyers. The potential fallout from the Japa-

nese nuclear incidents and the risk of additional regulatory response keeps a cloud over this

sector. It’s neutral now, but vulnerable to a further downgrade.

Absolute price performance for major sectors, for both 1 month and

3 months


FIXED INCOME

Both the 10 and 30 year Treasury’s rallied in February to challenge resistance. Both were

turned back. Inflation and interest rate fears are pushing yields higher and bond prices lower. There is great uncertainty on the horizon as Congress has yet to resolve the debt

ceiling. House Speaker Boehner is quoted as saying that “any increase in the debt ceiling cannot and should not pass without spending cuts and reforms.” According to JP Morgan analysts, “while it’s almost certain the Congress will eventually raise the debt ceiling in

tome for Treasury to avoid a default, a game of chicken that delays this decision in to June

is a clear negative for Treasuries.”

Walmart CEO Bill Simon recently announced that inflation “is going to be serious. We’re

seeing cost increases starting to come through at a pretty rapid pace.” Because of their

fixed payouts, bond prices do not perform well in times of increased inflation.

Bonds, like the U.S. equities markets, are at a critical point. If price breaks below the sup-

port levels (below), it would suggest that the bond market has a growing anticipation of higher inflation (and interest rates). Both have negative implications for any fixed income

investments.


INTERMARKET RELATIONSHIPS The relationship between bonds, commodities, the U.S. dollar and the stock market

Intermarket relationships are key to understanding economic cycles. Generally speaking:

Bond prices and commodities trend in opposite directions; Bonds usually trend in the same direction as stocks. Any significant divergence warns of a possible reversal in stocks.

A falling dollar will eventually cause commodity prices to rally which in turn will

have bearish implications for bonds and stocks.

Falling interest rates pull the dollar lower. With the falling dollar, we initially have fal-

ling commodity prices. As interest rates are falling, bond prices and later stock prices rally. [There are periods of time when these relationships are in transition, and even

occasionally, reverse]. Eventually, the falling dollar pushes commodity prices higher. Rising commodity prices pull interest rates higher and bond prices lower. The lower bond market eventually pulls the stock prices lower. Rising interest rates start to pull

the dollar higher, and the bullish cycle starts all over again.1

Intermarket Technical Analysis, John J. Murphy, 1991


The U S Bond ETF ($USB) follows the U S dollar in the below chart.

Stock and commodity prices are currently moving together. Here is a comparative

view of the Commodity Research Bureau (CRB) index and the S&P 500 ($SPX).

Do you notice anything funny about the relationship between the CRB and the broad

stock market?

Remember our initial tenet: commodities and stocks should not be moving in the

same direction. This suggests an unhealthy market. It is impossible to know which market will change to reestablish the normal relationships, or even when. But clearly,

caution is advised.


COMMODITY MARKETS

The dollar traded down to support at $76 and bounced briefly. Momentum indicators are

still negative suggesting the dollar might retest the 75.81 lows in the near term. There is a great deal of technical support just beneath the current price. If that support is broken, the

dollar is vulnerable to much lower prices.

WEEKLY CHART

DAILY CHART


Gold remains in a bullish trend, but as yet unable to break through resistance at $1450.

Support is the lower trend line. While the consensus is that gold will move up from this range and perhaps challenge the $ 2000 level. However, until the resistance level is vio-

lated, gold may continue to consolidate around 1430

Copper prices broke above resistance near the 4.70 target, but quickly fell back down into

the trading range. Price broke below the intermediate term trend line, and has made a se-

ries of lower highs and lower lows. Trend is now negative in this economic bell weather.


Crude oil prices briefly dropped below the intermediate trend line, but quickly rallied to

close the week at 107.07. The trend remains bullish while crude oil inventories are quite high. The March 30th EIA (Energy Information Administration) inventory report shows

Cushing storage at a record 41.9 million barrels. The maximum capacity is 44 million. U.S.

supplies overall rose to 355.7 million.

There is an increased focus on Natural Gas as an alternative to nuclear energy. But large

inventories continue to hold price down. The trend is positive, but within a larger price

range (consolidation). Until price moves above the prior price high (pivot), NG is neutral.


DEBT CLOCK

Burke -Leslie, LLC, is a registered investment advisor (RIA) with the SEC. The information contained within is neither a solici-tation nor an advertisement for any investment. The articles and information provided are for the benefit of our clients and are not an offer to purchase or solicit any mentioned investment. Opinions expressed about any security mentioned in this newslet-ter may change at any time and Burke-Leslie, LLC maintains no duty or obligation to update information as changes occur. While every effort is made to ensure accuracy of the articles published herein, we are not liable for any inaccuracies.

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april 2011 notes

Documents

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economic data