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NOLTE NOTES - Let's Get Back to the Financial Markets

Stock-Markets / Financial Markets Sep 04, 2007 - 12:27 PM GMT

By: Paul_J_Nolte

Stock-Markets The extra day off – thanks to the hard, back breaking work of the “laborer”, got an added boost from the unlikely duo of Mr. Bernanke and President Bush. While working hard in Jackson Hole, Wyoming, Mr. Bernanke indicated that the Fed stood at the ready to provide liquidity to the markets in case of additional disasters in the mortgage market. President Bush, as only a CEO could do, pre-empted his appointee and announced that he was proposing legislation to help all those poor souls who got themselves in too deep chasing the American dream. The pronouncements put some added juice into the financial markets and they recovered all that was lost early in the week – albeit on very low volume.

This week is supposed to signal the end of the summer and the beginning of the end of the year (just ask any student!). This week will also bring a raft of economic reports – all to either calm ragged nerves or to confirm what many have suspected – the housing debacle is spreading to the rest of the economy. Employment will be watched closely, as the monthly jobs report has been showing an ever-slower rate of job growth that has been questioned by some as an early indicator of a rising risk of recession. The good news is that it is a short week – the bad news is there will be five days of data to analyze. 

The continued decline of volume in the markets make this week's move suspect, so we will be watching the early week market moves to determine whether the rally was merely a snap back after a large decline or the beginning of a new bullish phase. While our daily indicators have turned up and are actually very close to an “overbought” condition, the longer-term weekly data continues to point down and remains well above prior major market lows. Unfortunately, nearly every investor is anticipating that the recent market lows will be visited once again prior to another assault on all-time highs.

However, the markets normally do what is least expected – so just maybe the lows for the year have been achieved and we go right up from here. There is one item that bears watching – the September/October period, especially in years ending “7” have been especially hard on the markets. One thesis that may be tested is that we are in the early stages of a bear market and that the recent lows will not hold any decline and stocks work much lower over the next eight weeks. We hope to have see some clues in early trading this week, but in any event it should be a wild ride.

As suspected, the bond model has reverted back to a “sell”, as short-rates rose, commodity prices kept rising and the utility average dipped. After getting very steep, the yield curve is once again very flat, with less than 10 basis points between 13-week and 30-year bonds. We are expecting that the Fed will cut rates at some point later this year, however if the economic reports remain relatively strong, the Fed is likely to leave rates as they are, opting instead to deal with the sub-prime issue via the discount window as they have done in August. Finally, keep an eye on commodity prices, as they provide some insight into overall global economic growth. Although not jumping at the double-digit rates of early in the year, they still are rising by mid-singe digit rates and have not declined year over year since 2002.


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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