Nolte Notes - Market Equilibrium

By: Paul_J_Nolte

Ladies and gentlemen: we have reached cruising speed, the turbulence of a few months ago is merely a memory and with the added boosts from mergers and acquisitions, we should be flying by the moon in just a couple of weeks. While just a bit fanciful, the markets are not interested in stopping or even slowing down for economic reports that conflict with the view that all is well in the world of investing. While the current euphoria over stock investing will likely last for a while longer, we are surprised at the few actual declines in the markets over the past two months. Housing, the kill-joy of the economy (along with the recent poor reports on retail sales) still shows little in the way of good news, as starts looked ok, but permits (the future construction) declined again – as did the index of sentiment of home builders n general.

Energy prices are having an impact upon retail sales as well as miles driven, as retail sales were punk – although reasons why ranged from weather (when is it not?) to an early Easter. For the first time in over 20 years, average miles driven has actually declined – not enough to slow the lack of supply of gasoline, but a point worth noting – we are likely close to a painful price in a gallon of gas. Home sales as well as durable goods orders are up for review this week, but outside a large surprise, the deals will remain the primary focus for investors.

While the Dow was making record closing highs nearly every day and the SP500 is closing in on its all-time high, something interesting is occurring below the surface – a lack of participation by the rest of the market. Over the past month, the once hot small cap arena has actually declined and technology stocks have stalled over the past three weeks. The former has a large impact on the advance decline line, the latter on the psyche of investors. Last week both the SP500 and Dow tacked on better than 1%, however there were more declining stocks than advancing ones for the week.

Since May 8th , the Dow has added over 250 points, yet five of the nine trading days showed more declining stocks than advancing. Also of note: our volume accumulation figures remain below the peak set over a month ago, and if price is to follow volume, the markets are building vulnerabilities that are likely to resolve themselves with lower prices over the summer. The external “noise” of mergers and deal making is hiding the deterioration underneath the markets. This doesn't mean the markets decline immediately, but once they begin, the may fall further than many expect to repair the erosion that is occurring today.

For the first time since July of last year, the long bond is yielding more than short-term bonds. The inversion of the yield curve was calling for at least an economic slowdown (which we have seen) and the beginning of a return to a more normal curve (usually a percent to one and a half percent) may be beginning, which would actually be good for the economy. As with most things “monetary”, the effects of these changes are not likely to be felt for 9-16 months into the future. For now, we are still feeling the last rate hike in June and the nine-month inversion that followed. Our bond model dropped one last week, but remains in positive territory, calling for lower rates in the future.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

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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