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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Financial Sector Distressed Issues Still To Be Dealt With

Stock-Markets / Stocks Bear Market Aug 24, 2009 - 12:23 PM GMT

By: Paul_J_Nolte

Stock-Markets

It’s getting better all the time or so says both the Beatles and the financial markets. The economic data regarding housing indicated that sales are picking up, however that is offset by the consumer data indicating that spending is not happening and jobs continue to be hard to secure. The housing (as well as car sales) data continue to be skewed by government bailout efforts. What makes the data more concerning for the long-term viability of any recovery that we may be in the middle of is much of the activity came from distressed sales, inventories of unsold homes still rose and home prices are still falling.


With mortgage rates stable, we would have expected a bigger boost to sales given the rather depressed prices for homes. While encouraging, we would like to see a healthier consumer and the data from retailers as well as incomes remain poor with jobs still a messy picture. The persistent rise in the stock market may be signaling an end to the recession or investors may be whistling past the graveyard.

It is natural for investors to look back at past bear markets for reference points on this bear market. A couple of points worth making: IF the bottom was in March, then the decline to “the” bottom was the shortest among the other bear markets (’29-32, ’73-’74 and ’00-’02). The recovery to Friday’s close is also much faster than either of the two recent bear markets and has surpassed the ’29 recovery phase for return (through last week, the ’29 and ’09 recoveries closely tracked each other).

What the current market has in net number of advancing stocks, it has lacked in volume. While the summer doldrums are cited as the culprit, volume over the past three summer months (from June through end of August) has actually expanded. While volume has declined “on the exchange”, composite volume (which includes the regional exchanges) has actually increased in each of the past two summers. Bottom line? Volume may not be as bad as first thought and could actually be supportive of a continued rally into the dangerous months of September/October. We are concerned that investor sentiment is getting bullish and valuations remain very high, but rising prices are begetting rising prices.

Bond prices managed to inch down a bit last week and the model remained in “bullish” territory, indicating that rates are likely to continue their decline. Spooked by strong housing data, bonds did fall on Friday (yields up) as bond investors continue to fret about any recovery that may force inflation higher due to the huge injection of money in the financial system.

Yield spreads between short and long-term bonds remain very wide, which should be healthy for the financially weak banking sector. With 81 “official” bank failures so far this year and more to come, we could see the spread remain very wide for the next two years. Eventually, the surviving banks will be showing tremendous incomes from their ability to loan at significantly higher rates than what they have to pay on deposits – just not yet!

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

Paul J. Nolte Archive

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