NOLTE NOTES
The Timid Consumer
by Paul J. Nolte, CFA
April 27, 2009

A modest decline in stocks is beginning to mask the overall weakness of the long-in-the-tooth rally. The economic data is still pointing to a contracting economy, just not contracting as rapidly as in Oct-Dec of 2008. We believe the current economic environment would be enough to scare investors from buying stocks, however in comparison to the near melt-down of last year, this “ordinary” recession is merely a walk in the park. The two-headed monster of real estate and banking continues to drive the weak data, even though the banking sector recorded some nice “profits” in the first quarter. Real estate buyers are holding back, waiting for further declines in home prices – and as home prices decline, it pushes more “marginal” homeowners into foreclosure. There are bargains to be had for the cash (or near cash) buyer, unfortunately consumers don’t have the necessary cash and are still wrestling with other debts that are still not under control. Once investors realize there remains a ways to go, stocks won’t stay up here long.

Little has changed from last week; many of our oscillators are at maximum levels, indicating that a correction looms ahead. We are beginning to see momentum also wane, as it is getting harder and harder for the markets to push ever higher. The huge drop on Monday was followed by small gains that nearly recovered, but ultimately fell short, setting up the momentum divergences. Whatever decline lasts more than one session is likely to be a defining one for the nascent bull market or resumes the bear market decline. Volume is a bit harder to read, as the Monday decline came on lower volume on the NYSE, but higher on the OTC. For the OTC market it marked the highest volume of the week. We are seeing one, maybe two-day corrections – which have allowed investors to hurry into the markets. However we are of the belief that bringing in more investors is also setting up for the most pain in the months ahead. The potential still exists for a test of the market lows of 670 on the SP500 – a long way from Friday’s close of 866.

Surprisingly, with treasury yields on the 10-year bond touching 3% last week (imagine, all the way UP to 3%!!), the bond model remains bullish, indicating rates could be falling in the weeks ahead. Commodity prices have been well behaved, yield spreads – the difference between the nearly zero short-term rates and the nearly 4% 30 year bonds should allow the banks to finally get healthy – as long as they stick to their knitting. However, so far, it looks like some are continuing the ruinous practices of the past two years. If the equity markets do embark upon a correction, especially if it morphs into a continuation of the bear market, buying treasury bonds today will reward bond investors.

© 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 | Email