The U.S. Dollar Comes to the Rescue of Consumers

By: Paul_J_Nolte

The almighty dollar has come to the rescue and just in the nick of time, as our hero – the consumer – was nearly out of cash and unable to spend to keep the giant economy moving. So the government waved their magic wand and poof a few billion dollars were created and tossed to those wanting to be ecology minded, who then traded in their big ugly vehicle for a nice new, more efficient one. Voila, not only do we have economic growth, but too the specter of employment to create these cars and all the other items the consumer will want now that the can spend again.

So goes the fairy tale, unfortunately we may very well be postponing the inevitable and creating false hopes of economic growth. The purchase of a new car also assumes more debt (that consumers already have too much of) and likely alters their spending from other “stuff” to cars. A bit of creative destruction to create some “demand”, maybe we should raze some homes so that we can build anew, give incentives for people to buy and we’ll be out of this mess in no time!

The improving economic figures have given the markets reason to continue their winning ways, hurtling and holding over 1000 on the SP500 by the end of the week. While the market is in need of rest, we are noticing that every decline during the day is met with buying so that by day’s end, the market is finishing with mild losses instead of the 100+ points of earlier trading. However, even with the closing rallies, we have noticed a decline of roughly 1000 Dow points since early April in our first/last hour analysis. We view the first hour of trading as knee-jerk reactions to the prior day or pre-opening news – it tends to be retail investors.

The last hour, when all the retail investors should be at their day jobs, a rally into the close is buying by those “on the floor”. From October ’08 to April ’09, selling after the first hour and buying before the last hour netted nearly 3000 Dow points, 3 times the actual Dow rise. However, since early April, the losses are exactly opposite of the Dow gains. Last time we saw this type of decline was exactly two years ago – between April and August of ’07. So far, interesting factoid, but we will see if the markets follow the smart or “dumb” money in the weeks ahead.

The very volatile 30-year bond is giving our model fits, having crossed over the signal line five times in the last eight weeks, we have seen the bond move between roughly 4.3% and 4.6% six times in that same span. Bond investors have a lot to worry about, from the declining dollar, to debt issuance (added supply), to rebounding economic pressures, to still higher government spending. Depending upon the day of the week, bonds are either rallying strongly or falling like a stone. Commodity prices have leveled out over the past two months, soothing some of the inflationary fears, however the willingness of Washington to spend (and ours to receive!) is filling the pipeline of bond issuance well above what many believe the markets will bear – without significantly raising rates to clear the inventory.

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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