Market Commentary

Sterling Market Commentary for October 3rd, 2011

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A Look at Friday’s Activity:  The overall market moved sharply lower in a broad based move that saw every index I track move lower on the day.  The weakest sectors were the Airlines, Broker/Dealers, Chemicals, Oil Services, Banking,  Cyclicals, High Tech, Commodities, the Retailers, and the Transports. Oil was lower by $2.94 to $79.20 per barrel, and Gold was higher by $4.90 to $1,620.40 per ounce.  In the grain markets, Wheat was lower by $0.45 to $6.092 per bushel, and Corn was lower by $0.40 to %5.924 per bushel, while  Soybeans were lower by $11.79 per bushel.

A Few Thoughts Before the Open:  In looking at the charts from Friday’s market activity I did not see a single index or stock that I would consider buying.  Everything has a negative pattern.  My concern in looking at the charts is that it appears that the selloff, or market downturn, could accelerate and we could see a repeat of August; only this time to lower lows.

 The Bottom Line:  I’ve been saying that I felt the market was in a sideways pattern with a downside bias.  While my 1st Rule of Trends is that a trend remains in place until it is broken. However my 2nd Rule is that the longer a trend remains in place, the greater the chance of it being broken.  One or Two more down days and we could see a retesting of the August lows.

In looking at the indices I track, I have the following updates on support and resistance:

Dow Jones Industrial Average:  The Dow Jones Industrials closed at 10,913.38  I currently see upside resistance on the Dow at 11,613.53 and downside support at 10,719.94 on a closing basis.    If support fails to hold at 10,719.94 then I see the next level of support coming in at 10.415.54 on a closing basis.

S&P 500 ‘SPX’:  The S&P 500 closed at 1,131.42  I see upside resistance on the S&P 500 at 1,218.89 and downside support at 1,127.79 on a closing basis. I think the S&P 500 is going to move lower and test 1,127.79.  If support fails to hold at that level, then I see the next level of support coming into play at 1,096.48

NASDAQ 100 Index ‘NDX’:  The NASDAQ 100 closed at 2,139.18  I now see upside resistance on the NDX at 2,192.96 and downside support at 2,038.22 I see the NASDAQ 100 continuing to move lower and testing support at 2,038.22 on a closing basis.  If support fails to hold at that level, then I see the next point of downside support beingat 1,975.33 on a closing basis.

The Dow Jones Transportation Average:  The Dow Transports closed at 4,189.37    I now see upside resistance on the Dow Transports at 4,221.60 and downside support level  at 4,082.51 on a closing basis.  I see the Dow Jones Transportation Average  continuing  to move lower and test 4,082.51 on a closing basis.

M.S. Commodities Related Equity Index ‘CRX’:  The Morgan Stanley Commodities Related Index ‘CRX’ closed at 761.16.   I now see upside resistance on the ‘CRX’ at 824.91 and downside support at 684.90

S&P Banking Index ‘BIX’:  The ‘BIX’ closed 113.16.  I see upside resistance on the ‘BIX’ at 120.71 and downside support at 100.96 on a closing basis.

Amex Broker/Dealer Index ‘XBD’:  The ‘XBD’ closed at 79.98   I see upside resistance at 80.87 and downside support at 80.87 on a closing basis. I am expecting the ‘XBD” to continue to move lower and test 63.48  on a closing basis.

S&P Insurance Index ‘IUX’:  The ‘IUX’ closed at 152.88 I see upside resistance on the ‘IUX’ at 175.13 and downside support at 143.80 on a closing basis.  I am currently expecting the ‘IUX’ to continue to move lower and test 143.80 on a closing basis. If the S&P Insurance Index ‘IUX’ closes below 143.80, then I expect the ‘IUX’ to continue to move lower and test 120.07 on a closing basis.

Amex Gold & Silver Index:  The Amex Gold & Silver Index ‘XAU’ closed at 185.00  I see upside resistance on the ‘XAU’ at 208.47 and downside support at 177.39

Amex Oil & Gas Index:  The Amex Oil & Gas Index closed at 1,031.82   I currently see upside resistance on the ‘XOI’ at 1,050.78 on a closing basis and downside support at 1,029.20.

M.S. Cyclicals Index:  The M.S. Cyclicals Index ‘CYC’ closed yesterday at 765.15  I currently see upside resistance on the ‘CYC’ at 789.46 and downside support at 710.93  on a closing basis.

M.S. Consumer Index:  The M.S. Consumer Index ‘CMR’ closed at 686.20  I currently see upside resistance on the ‘CMR’ at 691.44. and downside support at 657.87 on a closing basis.

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Uncategorized, Weekly Newsletter

Sterling Weekly for the Week of October 3rd, 2011

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3rd Quarter and Year to Date Index Performance Results

Since the previous edition of the Sterling Weekly the Dow Jones Industrial Average declined 277.31 points or approximately 2.48% to 10,913.38 As we have been commenting on in our Daily Blog, I believe the Dow Jones Industrial Average, as well as the overall market, is in a sideways pattern with a downward bias. I am now starting to believe we may be seeing a net set of downward trendlines form that may foreshadow a steep selloff to come. I’ll do some more work on this over the course of the next week and we can see how things develop.

Last Friday was the end of the 3rd quarter for 2011. I thought I would take a look and see how the various indices I track performed for the quarter and year to date. The results were worse than I thought. With the exception of 2 sectors which were mixed, every sector of the market I track was down for the quarter. The best performing sectors were the Gold/Silver and Utilities; both of which had mixed index performance for the quarter. I’ve posted the results below for everyone to review. It’s worth noting that the Dow Jones Industrial Average lost approximately 1,500 points for 12.1% in the 3rd quarter, and the Dow Jones Transportation Average lost approximately 1,234 points for 22.76% in the quarter as well. For those who follow the Dow Theory, this is a clear signal of a bear market; and in my opinion an indication that we will be back in a recession within the next 6 months.

Sterling Investment Services 2011 3rd Qtr Index Performance Report
Ticker
Closing Level
3rd Quarter Change
Index Name
Symbol
30-Jun-11
30-Sep-11
Points
Percent
1 Amex Gold Miners GDM 1,514.82 1,529.99 15.17 1.00%
2 Amex Gold Bugs HUI 521.56 526.19 4.63 0.89%
3 Phlx. Utility Sector UTY 447.79 451.24 3.45 0.77%
4 Dow Jones Utilities Index DJ-15 433.48 433.38 (0.10) -0.02%
5 Computer Tech. Index XCI 952.08 902.64 (49.44) -5.19%
6 S&P Retail Index RLX 529.96 492.91 (37.05) -6.99%
7 North Am. Telecom Index XTC 916.79 845.52 (71.27) -7.77%
8 NASDAQ 100 Index NDX 2,325.07 2,139.18 (185.89) -8.00%
9 Phlx. Gold/Silver Index XAU 201.13 185.00 (16.13) -8.02%
10 CBOE Technology Index TXX 876.49 803.77 (72.72) -8.30%
11 Amex Pharmaceuticals DRG 332.33 302.19 (30.14) -9.07%
12 S&P Healthcare Index HCX 410.93 367.23 (43.70) -10.63%
13 MS Consumer Index CMR 770.65 686.20 (84.45) -10.96%
14 Dow Jones Industrial Avg. DJ-30 12,414.34 10,913.38 (1,500.96) -12.09%
15 MS. Healthcare Providers RXP 1,827.17 1,602.65 (224.53) -12.29%
16 S&P 100 Index OEX 587.31 513.37 (73.94) -12.59%
17 S&P 500 Index SPX 1,320.64 1,131.42 (189.22) -14.33%
18 Russell 1000 Index RUI 734.48 623.45 (111.03) -15.12%
19 MS. High Tech. Index MSH 657.69 557.26 (100.43) -15.27%
20 Amex Interactive IIX 310.66 261.36 (49.30) -15.87%
21 Phlx. Semiconductor Index SOX 410.35 338.82 (71.53) -17.43%
22 S&P Banking Index BIX 137.40 113.16 (24.24) -17.64%
23 Natural Gas Index XNG 675.02 552.93 (122.09) -18.09%
24 S&P Insurance Index IUX 186.88 152.88 (34.00) -18.19%
25 Amex Oil & Gas XOI 1,304.31 1,031.82 (272.49) -20.89%
26 S&P Chemicals Index CEX 333.79 258.09 (75.70) -22.68%
27 Dow Jones Transportation DJ-20 5,423.82 4,189.37 (1,234.45) -22.76%
28 Amex MS Commodities CRX 1,003.37 761.16 (242.21) -24.14%
29 Amex Biotech Index BTK 1,460.63 1,102.56 (358.07) -24.51%
30 Amex Sec. Broker/Dealer XBD 107.15 79.98 (27.17) -25.36%
31 KBW Banking Index BKW 48.32 35.34 (12.98) -26.86%
32 Amex Disk Drive DDX 129.05 93.16 (35.89) -27.81%
33 Amex Airlines Index XAL 42.50 30.50 (12.00) -28.24%
34 Phlx. Oil Services Sector OSX 268.05 190.23 (77.82) -29.03%
35 MS Cyclical Index CYC 1,085.35 765.15 (320.20) -29.50%
36 Amex Networking NWX 302.87 213.44 (89.43) -29.53%
37 CBOE 5 Yr. Treasury Yield FVX 17.54 9.65 (7.89) -44.98%
38 CBOE 10 Yr. Treasury Yield TNX 31.58 19.24 (12.34) -39.08%
39 CBOE 30 Yr. Treasury Yield TYX 43.82 29.21 (14.61) -33.34%
———-
———-
———-
Average
1,139.01
(161.87)
-15.35%

The year to date numbers were only slightly less depressing. For the year to date, the Utility Sector is up almost 7%, while everything else is down; only just not as bad as the quarterly numbers. Year to date the Dow Jones Industrial Average is down approximately 664 pointy for a 5.74% decline, while the Dow Jones Transportation Average is down approximately 917 point for an 18% decline. Again, a clear signal of a bear market and a recession.

Sterling Investment Services 2011 3rd Qtr Year to Date Performance Report
Ticker
Closing Level
Year to Date Change
Index Name
Symbol
31-Dec-10
30-Sep-11
Points
Percent
1 Dow Jones Utilities Index DJ-15 404.99 433.38 28.39 7.01%
2 Phlx. Utility Sector UTY 421.84 451.24 29.40 6.97%
3 S&P Healthcare Index HCX 364.78 367.23 2.45 0.67%
4 Amex Pharmaceuticals DRG 305.88 302.19 (3.69) -1.21%
5 MS. Healthcare Providers RXP 1,640.72 1,602.65 (38.08) -2.32%
6 S&P Retail Index RLX 508.38 492.91 (15.47) -3.04%
7 NASDAQ 100 Index NDX 2,217.86 2,139.18 (78.68) -3.55%
8 Computer Tech. Index XCI 956.49 902.64 (53.85) -5.63%
9 Dow Jones Industrial Avg. DJ-30 11,577.51 10,913.38 (664.13) -5.74%
10 Amex Gold Bugs HUI 573.32 526.19 (47.13) -8.22%
11 CBOE Technology Index TXX 878.75 803.77 (74.98) -8.53%
12 Natural Gas Index XNG 605.48 552.93 (52.55) -8.68%
13 MS Consumer Index CMR 753.62 686.20 (67.42) -8.95%
14 S&P 100 Index OEX 565.90 513.37 (52.53) -9.28%
15 North Am. Telecom Index XTC 933.25 845.52 (87.73) -9.40%
16 S&P 500 Index SPX 1,257.64 1,131.42 (126.22) -10.04%
17 Amex Gold Miners GDM 1,705.45 1,529.99 (175.46) -10.29%
18 Russell 1000 Index RUI 696.90 623.45 (73.45) -10.54%
19 Amex Oil & Gas XOI 1,213.16 1,031.82 (181.34) -14.95%
20 Amex Biotech Index BTK 1,297.63 1,102.56 (195.07) -15.03%
21 Amex Interactive IIX 307.73 261.36 (46.37) -15.07%
22 MS. High Tech. Index MSH 664.20 557.26 (106.94) -16.10%
23 S&P Chemicals Index CEX 309.32 258.09 (51.23) -16.56%
24 Phlx. Semiconductor Index SOX 411.82 338.82 (73.00) -17.73%
25 Dow Jones Transportation DJ-20 5,106.75 4,189.37 (917.38) -17.96%
26 Phlx. Gold/Silver Index XAU 226.58 185.00 (41.58) -18.35%
27 S&P Insurance Index IUX 188.22 152.88 (35.34) -18.78%
28 Amex MS Commodities CRX 958.79 761.16 (197.63) -20.61%
29 Phlx. Oil Services Sector OSX 245.12 190.23 (54.89) -22.39%
30 Amex Networking NWX 280.56 213.44 (67.12) -23.92%
31 S&P Banking Index BIX 148.80 113.16 (35.64) -23.95%
32 MS Cyclical Index CYC 1,042.71 765.15 (277.56) -26.62%
33 Amex Disk Drive DDX 134.84 93.16 (41.68) -30.91%
34 KBW Banking Index BKW 52.21 35.34 (16.87) -32.31%
35 Amex Sec. Broker/Dealer XBD 121.51 79.98 (41.53) -34.18%
36 Amex Airlines Index XAL 47.02 30.50 (16.52) -35.13%
37 CBOE 5 Yr. Treasury Yield FVX 20.16 9.65 (10.51) -52.13%
38 CBOE 10 Yr. Treasury Yield TNX 33.05 19.24 (13.81) -41.79%
39 CBOE 30 Yr. Treasury Yield TYX 43.62 29.21 (14.41) -33.04%
———-
———-
Average
(109.69)
-13.65%

I really wish the numbers and results were better, but they are not. Over regulation continues to be a weight around the neck of our economy that is dragging it down like a drowning man trying to swim with an anchor tied to his foot. Unfortunately I do not see this situation changing anytime soon. My expectations are that we will continue to see a decline in the economy, and thus the market, through the 2012 election cycle. While things might change start to improve sooner if it looks early on like there is going to be a landslide that creates a change in Washington DC; however with the partisan nature of today’s politics I doubt that will happen. So, until things do change, I’ll probably spend a big chunk of my time looking for downside support levels.

Finally, it should be noted that the unemployment rate is scheduled to be released on Friday. This has the potential to be a major mover for the market.
Sterling Calendars for the Week of October 3rd, 2011
Economic Calendar
Date Est.
Time		 Release For Consensus Prior
10/03 10:00am ISM Index Sep. 50.5 50.6
10/03 10:00am Construction Spending Aug. (0.5%) (1.3%)
10//03 3:00pm Auto Sales Sep. 4.1M 3.97M
10/03 3:00pm Truck Sales Sep. 5.5M 5.43M
10/04 10:00am Factory Orders Aug. (0.1%) 2.4%
10/05 7:00am MBA Mortgage Index 10/01 N/A 9.3%
10/05 7:330am Challenger Job Cuts Sep. N/A 47.0%
10/05 8:15m ADP Employment Change Sep. 48K 91K
10/05 10:00am ISM Services Sep. 53.0 53.3
10/05 10:30am Crude Inventories 10/01 N/A 1.915M
10/06 8:30am Initial Claims 10/01 401K 391K
10/06 8:30am Continuing Claims 09/24 3,725K 3,729K
10/07 8:30am Nonfarm Payrolls Sep. 63K 0K
10/07 8:30am Nonfarm Private Payrolls Sep. 90K 17K
10/07 8:30am Unemployment Rate Sep. 9.1% 9.1%
10/07 8:30am Hourly Earnings Sep. 0.2% 0.2%
10/07 8:30am Average Workweek Sep. 34.2 34.2
10/07 10:00am Wholesale Inventories Aug. 0.6% 0.8%
10/07 3:00pm Consumer Credit Aug. $7.0B 12.0B

Sterling Investment Services Site Update

Since the last edition of the Sterling Weekly we have been making some upgrades to our web site (www.sterlinginvestments.com) and the services offered. One of the 1st things visitors to Sterling Investments will notice is a new design to our web pages. We have installed a new content management system and we are in the process of transitioning our legacy pages over to the new system. With several thousand legacy pages this is a time consuming process and will take some time to get fully implemented. We very much appreciate your patience during this process. As part of this process we have cleaned up our graphic images and streamlined our content and hopefully visitors will notice and appreciate the cleaner look to our site. Additionally the improvements to our content management system will allow us to offer more services to our clients; including a daily market commentary blog.

Sterling Market Commentary Blog

As part of our new services we are now publishing a blog. The primary focus of our blog is a daily market commentary. Over the course of the last 12-18 months there have been a lot of changes to the functioning of the stock market. One of the biggest being the growth in computer driven algorithmic and flash trading. While this form of trading serves to help increase the liquidity in the market, it has also dramatically changed the nature of the open of the market; specifically in my opinion it has dramatically increased the swings in the pre-market futures to the point where the expected open could change completely in the last 20 minutes prior to the open. While I still believe it is possible to engage in the form of short term trading I wrote about in the Prime Stock Newsletter, I no longer felt it was possible to publish the Prime Stock Newsletter with enough time prior to the open for it to be of meaningful value to our readers. As a result we have discontinued the publication of the Prime Stock Newsletter. Additionally I have decided to continue to write the daily commentary portion of the Prime Stock Newsletter as the main part of the Sterling Market Commentary Blog, making it free to the general public.

Additionally, the Sterling Market Commentary Blog is available as an RSS feed; and later this week we plan on having our blog available for real time email delivery as well.

Small Cap Research

Sterling Investment Services publishes custom research on micro and small cap companies. Our focus is on companies that are not receiving research coverage from the brokerage community.

Our latest research report Probe Manufacturing, Inc. (OTC: ‘PFMI’) This company is a contract electronics that we feel is an interesting turn around story. To see a of our report, please here.

Companies that are interested in obtaining research coverage should click here.

Prime Update:

We have discontinued the publication of the Prime Stock newsletter in order to focus our efforts on our Market Commentary Blog and white paper research publications. Archived copies of the Prime Stock Newsletter Performance Reports can be found (here).
Disclaimer: The Sterling Investments series of newsletters is produced by Sterling Investment Services, Inc. All information used in the production has been obtained from sources believed to be reliable and accurate. Sterling Investment Services does not warrant or assume any liability for inaccuracy of the information used to produce our publications. To receive further information on these services please visit our web page at: www.sterlinginvestments.com If you would like to contact us our fax # is (404)-816-8830 Email address is: enelson@sterlinginvestments.com Sterling Investment Services may hold positions in the securities recommended or may be providing consulting services to the companies mentioned within this report.

Market Commentary

Sterling Market Commentary for September 30th, 2011

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A Look at Thursday Market:  The overall market finished Thursday sharply higher in a wild day that saw the Dow Jones Industrial Average open up over 250 points higher before selling off and going negative before a late day rally caused the Dow to close up 143 points on the day.  Despite the late day rally, the major market indices were mixed with the Dow Jones Industrial Average and S&P 500 finishing the day higher, while the NASDAQ was lower on the day.   It was a relatively broad based move that saw the majority of the indices I track finish higher on the day.  The strongest sectors were Insurance,  Banking, Broker/Dealers, Transports, Utilities, Cyclicals, Oil & Gas, Healthcare related, and Consumer indices.  There was weakness in the Retailers.  and  High Tech indices.  Oil was higher by $0.93 to $82.14 per barrel, and Gold was lower by $0.60 to $1,615,50 per ounce.  In the grain markets,  Wheat was higher by $0.154 to $6.542 per bushel, and Corn was higher by $0.016 to $6.324 per ounce, while Soybeans were higher by $0.064 to $12.30 per bushel.

A Few Thoughts Before the Open: In looking at the charts from yesterday’s trading activity, despite the approximately 140 point move higher by the Dow Jones Industrial Average, I really did not see anything with a bullish chart pattern. There were only a very small handful of stocks setting new yearly highs, and none of them looked interesting.  The very vast majority of the heavy volume stocks continue to have bearish chart patterns. Really, the only stocks that look to be moving higher are utilities, and I have a tough time getting excited about them due to the constant regulatory overhang from our current administration.

In yesterday’s blog, I commented on the fact that I have noticed a very short term 16 day cycle that indicates we could see a short term high on or about October 3rd.  Guess in a couple of days we will see if I am accurate on this.

In this morning’s Wall Street Journal,  there was an editorial by Stephen Moore discussing how the current tax debate is drawing the focus back to the Flat Tax.  In the Sterling Weekly for the week of October 21st, 2008 I wrote a comparison of the various tax models and discussed there merits. I continue to stand by my argument that the Flat Tax is the fairest tax, and that the Flat Tax is the best tax to promote economic growth. For a look at that discussion,  please click here.

The Bottom Line:  I continue to believe the overall market is in a sideways trading pattern with a downward bias.

www.sterlinginvestments.com

 

Market Commentary

Sterling Market Commentary for September 29th, 2011

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A Look at Wednesday’s Market:  The overall market moved sharply lower on Wednesday in a broad based move, with the Dow Jones Industrials lower by approximately 180 points, that saw every index I track move lower on the day.  The weakest sectors were the Oil Services, Gold/Silver, Chemicals, Natural Gas, Banking, Cyclicals, Broker/Dealers, Biotech,  High Tech, Oil & Gas, and Transports.  Among the Dow Jones Industrials the weakest components were Bank of America ‘BAC’, Alcoa ‘AA’,  3M ‘MMM’, JP Morgan, and Caterpillar ‘CAT’ with each posting more than a 3% loss on the day.  Oil was sharply lower, down $3.24 to $81.21 per barrel.  Gold was lower by $34.50 to $1,616.10 per ounce.  Wheat was lower by 0.194 to $6.386 per bushel, and Corn was lower by $0.214 to $6.306 per bushel, while Soybeans were lower by $0.394 to $12.234 per bushel.

A Few Thoughts Before the Open: In looking at the charts from yesterday’s trading activity I have the following thoughts on this morning’s market.

1.  I think the across the board selloff in commodities is potentially signalling a decline in the economy.  If we see a continued decline in commodity prices then I think there is substantial increase in the probability that the U.S. economy will enter a recession within the next 6 months.

2.  Having completed my look at the individual stocks I did not see any stock setting a new yearly high with an attractive chart pattern; and the stocks with the heaviest volume all had bearish chart patterns.  Not a good sign if you are looking for a market rally.

3.  In looking at the charts of the various indices, I noticed that the chart of the Dow Jones Transportation Average was far more bearish than that of the Dow Jones Industrial Average.  Under Dow Theory, a pull back in the Dow Jones Transportation Average in conjunction with a pullback in the Dow Jones Industrial Average confirms the start of a bear market.

4.  Most of the sector indices I looked at where very negative in their chart patterns.

5.  I noticed that on August 15th,  August 31st,  and September 16th the Dow Jones Industrial Average set short term highs that were followed by moves downward.  If the pattern holds,  then the 1st days of October will see another short term high in the market.

The Bottom Line:  Despite positive early pre-market futures, I am not expecting any rally to hold its ground. I continue to maintain that the market is in a sideways trading pattern with a downward bias.  In my trading I am looking at short positions I can sell puts against.

www.sterlinginvestments.com

Market Commentary

Sterling Market Commentary for September 28th, 2011

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A Look at Tuesday’s Activity:  The overall market was sharply higher in a broad based move that saw basically every sector index I track move higher on the exception of the Banking, Retailers, and Airlines.  The strongest sectors were the High Tech, Chemicals, Cyclicals,  Natural Gas, Transports and Commodities.  There was weakness in bonds as interest rates moved higher on the day.  Oil was sharply higher by $4.21 to close at $84.45 per barrel.  There was a late day report on CNBC that an oil sheen in the Gulf of Mexico could be from the BP Macondo well, but that was later refuted by the U.S. Coast Guard.  Gold was higher by $57.90 to $1,650.60 per ounce.  Wheat was higher by $0.10 to $6.582 per bushel, while Corn was higher by $0.042 to $6.522 per bushel, and Soybeans were higher by $0.032 to $12,63 per bushel.

At one point yesterday, the Dow Jones Industrial Average was higher by almost 300 points when news hit that there might be some snags in the Greek bailout and the Dow Jones Industrial Average  promptly sold off 200 points before recovering 50 of them to finish the day up 150 points.  Among the gainers in the Dow Jones Industrial Average, Hewlett-Packard, Disney, and Occidental Petroleum posted the best percentage gains.

A Few Thoughts Before the Open:  Having completed my look at the charts of the indices I track,  I saw nothing that looked like it was in the midst of any sort of rally.  In fact despite a couple of days of impressive move,  the Dow Jones Industrial Average basically managed to only make it back to its 9-day moving average, neutral territory in my opinion.  Also, we should not forget that yesterday was the last day of the month to execute trades that settle in the month of September,  so we very could have seen a Window Dressing come into play the last couple of days where it would have been a big factor in moving the market higher.

I continue to maintain our opinion that the overall market is in a sideways trend with a downward bias.  Until we see the Dow Jones Industrial close above 11,613.53 we believe that sideways trend remains in place.  Remember the 1st Rule of Trend, a trend remains in place until it is broken.

I think we could see some jockeying for position today as we have a major economic release tomorrow in the form of Gross Domestic Product (GDP) and initial claims. This could easily move the market, as well could Personal Income and Spending numbers to be released on Friday.

www.sterlinginvestments.com

Weekly Newsletter

Sterling Weekly for the Week of September 26th, 2011

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Sterling Weekly for the Week of September 26th, 2011
Stagflation and a Bond Bubble

Since the previous edition of the Sterling Weekly the Dow Jones Industrial Average gained 198.56 points or approximately 1.8% to 11,190.69 As we have been commenting on in our Daily Blog, despite the recent move back higher, we see the overall market in a sideways trading pattern. Basically a running correction in our minds. Until the Dow Jones Industrial Average closes above 11,613.53 we are going to maintain our position that the Dow Jones Industrial Average, and the overall market, is in a sideways pattern with a downward bias.

This week we have a fairly heavy economic calendar with the important news being the release of Revised 2nd Quarter Gross Domestic Product (GDP). The current expectations are for a very anemic 1.2%, revised from a 1% estimated growth rate. Both very weak numbers. With nearly every forward looking economic indicator pointing to weakening economy and a probable US recession, I could not help but think of last week’s inflation numbers. Last month’s Consumer Price Index came in at an adjusted 0.4% for the month of August. While that may not sound bad, the year over year number is just under a 4% annual inflation rate, and with the exception 2007, this will be the highest inflation rate since 1990. Inflation is not transitory as the Fed likes to say, nor is it the answer to our economic problems as a lot of idiots on the financial channels like to say. Inflation causes real financial pain to citizens and consumers. It affects their spending patterns, economic and growth, as well as our standards of living. Also, it should be noted that inflation is not transmitted equally throughout the system. While inflation is up approximately 11.4% since 2005, the cost per kilowatt charged by my local utility is 40% higher than it was in August of 2005; and my home insurance cost has basically doubled. These are just a couple of examples, but the point of which is that inflation is not transmitted uniformly throughout the system, and some expenses can be cut back on and others cannot. This raises a point of concern, with the rate of growth in inflation, it would not take much more to see with the highest inflation rate since 1980-81 when was much closer to 10% Combine that with our slow growth and we have a real problem.

I have often said that inflation is like a cancer that eats away at the value of your assets and investments. Additionally, much like a cancer, once it takes hold and start to spread, it can increase at what seams to be an exponential rate. Let’s not forget that in 1972 the inflation rate was 3.4%, but then it jumped to 8.9% in1973, and to 12.1% in 1975. After dropping for a couple years inflation then jumped from 5.0% in 1976 (Guess nobody liked what Ford had done to bring down inflation) to 12.4% in 1980 (Jimmy Carter’s last year in office.)

What is troubling is that with slowing economic growth and rising inflation we are likely to see a return to stagflation, where I see one of the side effects of slow to no economic growth being slow to no growth in wages. Couple a lack of wage growth with rising inflation, and the American Consumer (and voter) is about to feel some real pain as their financial health deteriorates. This will force them to cut back on their discretionary spending and they are forced to pay more for items and things they can’t cut back on such as insurance and utilities.

I think this is also very damaging for the overall health of the investment community. Right now, investors in fixed income instruments and bonds are receiving a negative real rate of return on their investments. (A negative real rate of return is when the interest paid is less than the rate of inflation.) In my opinion, the Fed under the Bernanke is creating a bond bubble that could have potentially disastrous consequences world wide when it implodes. With a 4% inflation rate, we should be looking at 5.25% Federal Funds rate, and closer to a 7% yield on the 30-Year Treasury Bond; and we are no where close to these interest rate levels. As a result, when the bond bubble finally bursts, I see interest rates moving far past, and higher, than those target numbers as the market struggles to adjust. This has the potential to dramatically destabilize the financial system in a manner far worse than the bursting of the housing bubble as higher rates flood through the system.

There is a strong contingent of the voting population that believes the Federal Reserve has become politicized and is buying the Federal Government’s debt in order to avoid having interest rates shoot through the roof as a result of the Government’s obscenely deficit levels. This is an exceptionally dangerous game to play. When a change finally comes to the White House, and sooner or later it will, the new resident is probably going to do his or her best to end the Fed’s current bond buying binge; and then like any other binge, we are likely to experience one hell of a hangover. Remember, no bubble is ever sustainable, and their is always tremendous pain when they burst.

I think our current levels of deficit spending our not only reckless, they are dangerous as they are potentially creating a bubble in bond prices that is not sustainable and could potentially lay waste to all sovereign debt markets. This would be the result of our rapidly rising interst rates pushing up interest rates first in sovereign debt markets around the world (and then corporate markets) to levels they are ill-prepared to afford or handle. If this were to happen, our “Great Recession” could become another “Great Depression.” I hope I am wrong, but so far all the evidence points to a bond bubble, and every bubble eventually bursts. I grew up living with my Grandparents who lived through the Great Depression, and for them it was a matter of survival. Historically what we know worked then was to buy equities and try to wait out the economic pain for the eventual recovery. We are continuing to evaluate the situation and advise our clients appropriately.
Sterling Calendars for the Week of September 26th, 2011
Economic Calendar
Date Est.
Time		 Release For Consensus Prior
09/26 10:00am New Home Sales Aug. 293K 298K
09/27 9:00am Case-Shiller 20-City Index Jul. 4.5% (4.52%)
09/27 10:00am Consumer Confidence Sep. 46.7 44.5
09/28 7:00am MBA Mortgage Index 09/24 0.6%
09/28 8:30am Durable Orders Aug. 0.0% 4.1%
09/28 8:30am Durable Orders – Ex. Transports Aug. (0.2%) 0.8%
09/28 10:30am Crude Inventories 09/24 (7.336m)
09/29 8:30am Initial Claims 09/24 420K 423K
09/29 8:30am Continuing Claims 09/17 3,713K 3,727K
09/29 8:30am GDP – Third Estimate Q2 1.2% 1.0%
09/29 8:30am GDP Deflator – Third Estimate Q2 2.4% 2.4%
09/29 10:00am Pending Home Sales Jul. (1.3%) (1.3%)
09/30 8:30am Personal Income Aug. 0.0% 0.3%
09/30 8:30am Personal Spending Aug. 0.2% 0.8%
09/30 8:30am PCE Price – Core Aug. 0.2% 0.2%
09/30 9:45am Chicago PMI Sep. 54.0 56.5
09/30 09:55am Michigan Sentiment Sep. 57.6 57.8

Sterling Investment Services Site Update

Since the last edition of the Sterling Weekly we have been making some upgrades to our web site (www.sterlinginvestments.com) and the services offered. One of the 1st things visitors to Sterling Investments will notice is a new design to our web pages. We have installed a new content management system and we are in the process of transitioning our legacy pages over to the new system. With several thousand legacy pages this is a time consuming process and will take some time to get fully implemented. We very much appreciate your patience during this process. As part of this process we have cleaned up our graphic images and streamlined our content and hopefully visitors will notice and appreciate the cleaner look to our site. Additionally the improvements to our content management system will allow us to offer more services to our clients; including a daily market commentary blog.

Sterling Market Commentary Blog

As part of our new services we are now publishing a blog. The primary focus of our blog is a daily market commentary. Over the course of the last 12-18 months there have been a lot of changes to the functioning of the stock market. One of the biggest being the growth in computer driven algorithmic and flash trading. While this form of trading serves to help increase the liquidity in the market, it has also dramatically changed the nature of the open of the market; specifically in my opinion it has dramatically increased the swings in the pre-market futures to the point where the expected open could change completely in the last 20 minutes prior to the open. While I still believe it is possible to engage in the form of short term trading I wrote about in the Prime Stock Newsletter, I no longer felt it was possible to publish the Prime Stock Newsletter with enough time prior to the open for it to be of meaningful value to our readers. As a result we have discontinued the publication of the Prime Stock Newsletter. Additionally I have decided to continue to write the daily commentary portion of the Prime Stock Newsletter as the main part of the Sterling Market Commentary Blog, making it free to the general public.

Additionally, the Sterling Market Commentary Blog is available as an RSS feed; and later this week we plan on having our blog available for real time email delivery as well.

Small Cap Research

Sterling Investment Services publishes custom research on micro and small cap companies. Our focus is on companies that are not receiving research coverage from the brokerage community.

Our latest research report Probe Manufacturing, Inc. (OTC: ‘PFMI’) This company is a contract electronics that we feel is an interesting turn around story. To see a of our report, please here.

Companies that are interested in obtaining research coverage should click here.

Prime Update:

We have discontinued the publication of the Prime Stock newsletter in order to focus our efforts on our Market Commentary Blog and white paper research publications. Archived copies of the Prime Stock Newsletter Performance Reports can be found (here).
Disclaimer: The Sterling Investments series of newsletters is produced by Sterling Investment Services, Inc. All information used in the production has been obtained from sources believed to be reliable and accurate. Sterling Investment Services does not warrant or assume any liability for inaccuracy of the information used to produce our publications. To receive further information on these services please visit our web page at: www.sterlinginvestments.com If you would like to contact us our fax # is (404)-816-8830 Email address is: enelson@sterlinginvestments.com Sterling Investment Services may hold positions in the securities recommended or may be providing consulting services to the companies mentioned within this report.