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$4 Billion Golden Oppoerunity

U.S. Housing, Dollar and Bonds

Stock-Markets / Financial Markets 2009 Nov 23, 2009 - 09:36 AM GMT

By: Paul_J_Nolte


If this is the recovery, I would hate to see what a recession looks like!! Housing data released in the last week showed a still lousy housing market – from home builder confidence index that declined by a point to remain well under 20 (50 is “balanced”). Even traffic for new homes was near record lows. Housing starts and permits (a leading indicator of future starts ) both fell again. The Mortgage Bankers report of home purchases fell to a new low and are still down 15% vs. year ago levels.

Manufacturing, a mini-bastion of relative health, saw a modest rise in capacity usage, although output was stable and inventories fell. The much hoped for inventory-rebuilding process remains elusively somewhere in the future. On top of all that, Treasury Secretary Geithner defended the administrations actions while Fed Chief Bernanke made a rare comment on the declining dollar. A short week with a short list of things to be economically thankful for, so take comfort with family and friends and enjoy the time together.

Wall Street seems to have taken off early for the Thanksgiving week, as volume once again contracted and has been 5-25% below the past four week average since the opening days of the month. The shortened week will contract many of the economic releases into the first three trading days, but the focus of the markets seem to be strictly on the dollar. Moving nearly exactly opposite of the dollar on a daily basis, any significant (and surprising) rally in the dollar could bring about a quick decline in stocks.

Our longer-term indicators have already rolled over and have been declining for a few weeks, while many of the daily readings are attempting to surpass their highs made in late September. It is these divergences, while they can last for quite some time, are early warning signs not everyone in the markets are dancing to the same tune. Small cap stocks have been under performing the SP500 since mid-September and have turned lower from their second attempt at new recovery highs. The international markets, due to some modest strengthening of the dollar, is also beginning to under perform the SP500. Given that the correlations between each of the markets have been high since the bottom in March, we could see a global correction in the equity and corporate bond market sometime in the next 6 months.

For the first time in four weeks, the bond model has flipped over to a positive reading, with a decline in the yield on 30-year bonds getting just under 4.3%. The big news in bonds was the negative yield on short-term treasuries – meaning you automatically lost money making the investment. This was last seen in this market during the financial collapse last year, however this year money managers are looking for the most liquid place to stash cash until yearend.

The difference between the short and long-term bonds remains well above 4% and based upon historical duration of 4% spreads, we could see the spread stay in this range until near mid-year 2010. Commodity prices and gold continued their rise as the dollar declined. Keep an eye on long-bonds, as a further decline likely will spell additional deflationary pressure.

By Paul J. Nolte CFA

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.

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