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NOLTE NOTES - Bond Market Rallies Despite Rising Inflation, Stocks to Buck Season Trend and Head Lower

Interest-Rates / US Bonds Nov 19, 2007 - 03:28 PM GMT

By: Paul_J_Nolte

Interest-Rates The inflation figures released last week did little to derail the bond rally of the past few months. While it was in-line with expectations, the year-to-year inflation figures are running higher than many are comfortable with and as such, expect that the Fed is not going to cut rates that is already factored into the market. This holiday week, we'll get some housing data that many are hoping will indicate that housing is beginning to stabilize.

However, much of what we are hearing from around the country indicates the housing market remains weak without a “bottom” in sight. Once past the housing figures, Wall Street will begin to resemble a ghost town as many abandon their desks for a seat at the “big table” with a full helping of turkey and all the fixings. Then we'll settle down and begin watching our favorite pastime. No, not football, but what has become the mania that is the beginning of the holiday shopping season. We'll watch all the breathless reports about how full the malls are and how much is being spent – all in the name of economic research about the health of the consumer – I can't wait!

The markets managed to make it into positive territory with a closing rally on Friday, however the weekly close higher masks the very volatile week and too the negative tone that remained after Friday's closing bell. The NYSE has experienced a few “90/10” days over the past few weeks – where 90%+ of the number of stocks trading either finished higher or lower. This also pertains to advancing to declining volume as well. Historically, this has indicated a topping or bottoming process – however the markets have experienced both within periods as short as a week over the past three months.

What has been missing has been “follow-through” or the ability of the markets to continue higher/lower after one of these occurrences. Either way, we continue to expect the market to buck the seasonally positive trends and work gradually lower. Why? Volume figures continue to grow as the market declines and shrink when it advances. Until this trend reverses itself, we are expecting that Scrooge will likely play a bigger role around Christmas than historically has been the case.

Bonds especially Treasuries, continue to be the safe haven investment, as investors continue to expect the Fed to cut interest rates at their next meeting on December 11 th and maybe provide a bit of holiday cheer. Our bond model remains positive at “4” – pointing to still lower interest rates over the remaining weeks of the year. Commodity prices declined a bit and the dollar rose a bit to provide a bit of support to rates. The housing sentiment index on Monday may give the bond market something more to cheer as expectations are for still weaker figures. Bond investors will also be watching the retailers on Friday as a gauge of consumer's health. Will the debt balloon continue to expand? Watch the malls on Friday.


By Paul J. Nolte CFA

Copyright © 2007 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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