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New President, New Opportunity

Politics / Recession 2008 - 2010 Jan 20, 2009 - 02:33 PM GMT

By: Paul_J_Nolte

Politics Every four years or in recent times eight years, the country gets a new President to lead the country into the future. With so much hope and expectations placed upon Mr. Obama, the risks of not making those expectations are large. And while the country may be filled with hope and pride upon the election of the first Africa-American President – back at Wall Street, it is more of the same old “stuff”. Both Citigroup and Bank of America went to the government well to take another drink of TARP money to cover over more of the past sins of lending.

The economic recession/depression is not yet showing signs of moderating and we are hitting the middle of earnings season – what is not to like about investing! So far this year, as was the case last year – the high for the year was the first trading day and the gradual decline in '09 has been a test of the bullish resolve. Corporate comments regarding earnings season will be very important this quarter, we have already seen from Intel and JPMorgan's indications that the recession is not moderating. Here's to the new administration and a better economic outcome.

Last week we highlighted a few of the signs that the market was improving, from better volume trends and advance decline trends. However there are also some problems that have yet to be resolved that leaves the door open to lower prices ahead. First has been a rapid increase in bullish sentiment as captured by Investors Intelligence. The most recent reading of 43% bullish is above any reading since mid-June last year and strikes us as a bit optimistic if we are expecting “the bottom” to already be in place. Usually sentiment stays bearish as the market rises, however sentiment snapped back just as fast as stocks.

We would prefer the market to rise without the bullish sentiment as investors stay away as stocks rise, believing the worst is still ahead. The market itself is also of concern, as it has yet to register a higher high or higher low. This stair step downward pattern can be broken IF the markets do not get below 740 on the SP500 or can close above 1010 to the upside. Until then we are at best in a trading range that will serve to frustrate the early bulls (and maybe get sentiment lower!) and keep the “buy and hold” crowd on the sidelines in favor of the nimble trader.

Lower commodity prices, lower stock prices as well as oil prices have been a bit of heaven for bond investors. While income generation in the short-term treasury market is negligible with rates below a half of one percent, at least principle is remaining intact. Our model still points to lower bond yields, however we are getting to the point that any turn in either short rates or commodity prices will quickly turn the model negative. While the model may turn, bonds outside of treasuries may still benefit as the bond markets are looking like they are improving from the severe lock-up of the past quarter.

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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