NOLTE NOTES
Employment Numbers, Trading, and Bonds
by Paul J. Nolte, CFA
January 12, 2009

A bit of Wall Street lore was marked off last week. As the first five days go, so goes January and as goes January, so goes the year. Well, the first five looked OK, however on the sixth…. The employment report, slated to be poor, was and scared many investors back into their respective bunkers awaiting the likely very poor earnings season. For those looking for a bit of a silver lining to any of the data, there really wasn’t any. Employment was poor and not getting “less poor”, housing remains lousy although some help may come in the form of low interest rates (assuming one has a job to pay the mortgage!). The President-elect is pounding the table for more stimuli. The trade data will be scrutinized carefully looking for clues about the overall health of the global economy – are we exporting more or importing less. The inflation (or lack thereof) reports may also provide some clues about the depth of the deflationary environment – is it just oil or are we seeing contraction in a whole host of products/services. Oh, and one more week to kick the current administration around – in Washington and maybe in my home state of Illinois.

There are plenty of signs in the marketplace that indicates an improving investment environment as well as many that point to still lower prices ahead. For starters, the volume picture is brightening – for example we are seeing many more days where volume is expanding as prices rise and contract when they fall. Friday was a perfect example as volume was the lowest for the week and the 250-point decline on Wednesday could not muster higher volume than either meager gains of 60 and 80 points on Monday and Tuesday. While the market declined for the week, there were more stocks rising on the NYSE than falling – again, an indication of broader participation than what the headline indexes may indicate. But (and there is always a but!) many of our short-term momentum models are hitting high levels that have historically indicated and ending to the bullish run. After a nearly straight up 20% gain, some consolidation is warranted. We are expecting a consolidation – not a return to the free-fall of the fourth quarter. Not only will the number of declining issues be watched for indications of expansion, but also volume, as a sign investors are abandoning stocks expecting a significant decline.

Bonds remain a “buy” according to our model, however the gains of the past few weeks have not been in the safe haven Treasuries, but in nearly everything else. Corporate bonds have rallied along with stocks as signs of the credit crisis are abating. Even high yield bonds are showing signs of improvement; our conservative nature is keeping from getting too aggressive in this risky asset class. We recently sold off some of our Treasury holdings while increasing our corporate bond exposure in income accounts. If we begin to see an expansion in credit spreads again, we will reverse the recent moves, interestingly those signs are likely to emanate from poor stock market performance.

© 2009 Paul J. Nolte, CFA
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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.

Contact Information
Paul J. Nolte, CFA
Director Investments
Hinsdale Associates
630-325-7100
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