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U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Investment Strategy Favours Corporate Bonds

Interest-Rates / Corporate Bonds Feb 09, 2009 - 12:10 PM GMT

By: Paul_J_Nolte

Interest-Rates Best Financial Markets Analysis ArticleThe worst employment report in well over a decade and the market jumps nearly 3% - could stocks be whistling past the graveyard or is there something more that we're missing? To be sure the news is bad and is going to be bad for the next couple of months as the reports are referencing the worst part of the severe recession. Job cuts seem to go hand in hand with earnings reports, housing remains dormant and even new home construction is well below “replacement” rates.

The market's focus is not so much on the most recent economic release, as they are already assumed to be bad, but on any plans by the government or Federal Reserve to shore up the financial system. Currently on the table is a new/improved plan by Treasury Secretary Geithner to redo the current TARP plan. Also being bandied about is the thought/threat of nationalizing the banking system. With lower interest rates around the world and effectively a zero interest rate policy here, there is little that can be done to entice borrowing, it has come down to essentially browbeating the banks into making loans and cleaning up the lousy balance sheets.

Another successful test of the 800 level occurred last week, but now the more important (for the bulls) is a test of the 880 level, that if cleared, could pave the way for 910, then 950. Even if the markets do make it all the way up to the 950 mark, it will only achieve a retracement of 38% of the decline from May '08. As we have highlighted over the past few weeks, volume seems to be favoring the bullish side to this point, as volume has been increasing with the rallied and subsiding with the declines since the market bottom in October/November.

Still a large concern is that the current rally could be nothing more than yet another 20%+ jump in stocks that ultimately fails and rolls back down to the prior lows. This would be the second such rally (first one ended with the first trading day of the year) that could begin to put fear into investors mind that stocks will never recovery and should only be “rented” and never owned. Our models still project, from even today's levels, a 10-15% compounded annual rate of return over the next 3-7 years, although the rally could take the rest of this year before developing into something sustainable.

While the bond model remains positive, it is hanging onto that reading with fingernails. The recent rise in both short and long-term rates as well as a recovery in commodity prices could move the model back to negative territory over the next week or two. With a backup in treasury rates over the past few weeks, the model would merely be confirming instead of predicting the move. Our investment philosophy has shifted over the past three months to avoiding the treasury market in favor of the agency and corporate bonds. We are not buying the corporate directly, but via a fund to avoid making poor specific bond selections - which remains a concern at this part of the cycle.

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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