A Stocks Bull and Bear Market

By: Paul_J_Nolte

Looks like I picked the wrong week to quit sniffing glue! Up until Friday, last week was a pretty bad year, down over 13% and the specter of another US bank hitting the ropes along with most, if not all the auto companies sent investors running for the safety of government bonds. The yields are now below 0.05% on 3-6 month bills (that is NOT a misprint!). By Thursday's close, the markets had erased all of the gains from the bull market of '03-'07 and pushed the SP500 down to levels that were first breached during April of '07.

Of course, the economic numbers look bad and the coming week, although a holiday shortened one, will be chock full of data including more housing related data and a glimpse of economic growth in the third quarter. The Friday rally could be attributed to bargain hunting or the announcement of the new Treasury Secretary, either way it allowed investors to step a bit lighter going into the weekend. Finally, this week begins the holiday season and the focus will be intense on the retailers. So once the turkey digests and the last piece of pie has been tucked away in your stomach, get out and do your patriotic duty on Friday and shop!

Now that the bull market gains have been erased and there is blood in the streets (knee deep!), what is an investor to do? The rapid unwinding and capricious daily selling in the markets have surprised us, leaving many stocks selling for less than what they could fetch if the entire company were sold off.

Our long-term models continue to point to well above average returns for stocks over the next 3-10 years, given the depressed levels that exist today. Of course stocks could go lower still (some are calling for another 30-50% from Friday's close), however we do not believe the economic conditions warrant that type of decline. Given the huge compression in the market over the past 12 weeks, a rally of 15-20% could easily occur without breaking the markets out of the bear market trend that is in place. We still have the opinion that those with at least a 3+ year horizon should be slowly increasing/adding to equity holdings. Once the sun starts shining again the bargains of today will no longer exist.

The bond model continues to point to lower rates, but given the huge move into the “safe” investment, the question remains open as to whether rates can go much lower. Certainly short-term rates can't fall too much further, given the rates outlined above. Even the two-year note is getting close to being less than 1% annually.

Commodity prices continue to fall; money has been poured into the financial system, potentially increasing inflation in the future (but that presupposes that credit is being created – and today it is not) so what are fixed income investors to do? As nasty as things are getting in the corporate bond market, it may be the time to buy some quality short-term corporate debt. Spreads have widened out to levels that we haven't seen since the Depression (there is that comparison again!). While default rates are likely to rise further, some very viable company debt can be had for high rates of interest.

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

Copyright © 2008 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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