Nolte Notes - Financial Markets attempting to make a bottom in the short-term

By: Paul_J_Nolte

The issue du jour has been alternating between the sub-prime mortgage “contagion” and China trying to slow their economic growth and by extension the speculation in their markets. Banks, brokerage firms as well as loan companies directly involved in the mortgage business are being affected, however no one is quite sure how pervasive the problem is (or can be) and ultimately the impact upon the consumer and the economy.

Retail sales came in below expectations as weather was cited as a problem (what IS good shopping weather?) and brokerage earnings reports outlined some problems with their sub-prime mortgages – but little else was disclosed. China is a whole separate issue, as their local market has doubled in less than a year and the government has hiked both interest rates (again this weekend) and increased investment requirements for speculation.

Japan too has raised rates, albeit from near zero, but may begin to stem the monetary go-round from the US to Asia back to the US (we buy the goods, they borrow cheap Yen and invest back in US bonds etc). These issues were on the investment landscape lat in '06, however with stocks rising, the impact was believed to be minimal. However, now that stocks are falling, the problem is seen as enormous. The manic depressive market continues to thrive!

Our daily indicators are beginning to show the markets are trying hard to bottom, however the longer term weekly data indicates more pain in the future. If we could draw up the perfect scenario, it would be that the market actually rallies a bit, rising a couple of percent from current levels before once again probing the depths of the most recent decline sometime in late spring/early summer. Many of our weekly indicators have rolled over and for them to go from the top of the chart to the bottom usually takes 3-5 months, with some decent rallies in between.

Our newest indicator that needs to reverse is volume based that looks at whether the market rises or falls on volume higher than the previous day. The rally from the low has come on progressively lower volume, and therefore does not register, however the declines have been on higher volume, pushing the chart lower. While it did not “call” this decline, it did a good job of pointing to the 2006 rally, as well as correction last May. Since we believe that volume is an indicator of investor interest (or disdain) for investing, we will watch how the future rally unfolds as to whether the correction is over or just beginning.

Inflation reports were much “hotter” than expected, as a combination of higher energy, food and yearly hikes in various products (like tobacco) all hit at the same time. Bonds however moved very little on the news, as investors seemed focused on mortgage issues. Today's inflation rates are above those desired by the Fed, so expectations are still high for still higher rates to keep inflation under wraps, however inflation rates are still well below those of 2000. What makes the inflation rates a concern is Bernanke has said so – otherwise few might notice. For the record, our bond model continues to point to lower rates in the weeks ahead. Also, keep an eye on the commodity price index, as it seems to have peaked.

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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