Financial System Still Struggling to Gain a Firm Footing
Stock-Markets / Credit Crisis 2009 Apr 20, 2009 - 09:25 PM GMTBy: Paul_J_Nolte
Based upon the earnings of the banks so far, it looks as though the TARP program is working. Provide banks a whole bunch of money and create a very wide spread between short and long rates and even the less than stellar banks should make money. However, with much of the gains coming from the benevolent government aid (that is not likely to be repeated in subsequent quarters), the above average (and positive) earnings may be nothing more than a one-quarter phenomenon. There was additional evidence this past week that the economy is still deteriorating.
Industrial production continues to fall, unemployment claims remain very high and housing also remains very weak. The lower mortgage rates have not yet spurred home purchases as much as refinancing of existing mortgages. With home inventories still around 12 months (normal is 5-6), it looks like more declines in home prices are still ahead – and with that more defaults that will continue to impair bank earnings and balance sheets.
With the rally extending to six weeks (and counting) many are getting nervous that a great opportunity has been missed to get in on the ground floor of the next bull market. Since early October, there have been seven different rallies in the market, with an average gain of roughly 17.5% lasting about 20 trading days (or four weeks). The current rally is the strongest of the bunch, but has yet to prove more durable than any of the prior six. Many of our internal measures of the markets are showing that it is well overdue for some type of correction that could see a decline of 5-10% from current levels.
Any decline of more than 12-13% could mean that this is no more than a bear market rally, with a smaller decline indicating that there may be a fair amount of upside left in this market. We have been looking for things to get “less bad” and by some measures they are, however with housing and the consumer still struggling to regain their footing, the transition from less bad to better could take a much longer period than many expect.
A bit of rotation from treasury securities to corporate bonds last week was enough to push the model to a “buy” indicating yields are expected to decline. We are usually suspect of the first instance of a buy, as many of the model inputs are just barely positive. With all the activity in bonds, from the government issuance to cover bailout costs and purchasing of treasuries to liquefy the financial system, trying to guess the next direction of rates is becoming much more difficult. The lack of inflationary pressures should allow rates to stay down much of this year, but save for another huge slide in the economy; we don’t see a big declines in rates ahead.
By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com
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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