NOLTE NOTES
Spring Flowers
by Paul J. Nolte, CFA
March 8, 2010

Stealing a line from the Beatles…it’s getting better all the time! The great snow job on the employment report turned out to be more of a dusting than an avalanche. While the economy continues to lose jobs (the job-loss recovery), it did so at a “better” rate and the back months were revised higher. Consumer spending picked up a bit (albeit at a faster pace than incomes) and consumer credit actually expanded (a good thing?) last month. The financial markets are seeing spring all over again (remember green shoots?) and have been bidding up stock prices in expectation that earnings will soon surpass their 2007 peak, putting the valuation on today’s market a rather mild 13 times earnings. Oh, there still is the issue of real estate that is struggling to find new owners and banking concerns that won’t lend (never mind that too big to fail – they are even bigger today than in ’08). For now, the markets are looking at the sunny side of the street, keeping the bearish camp still deep in hibernation. The coming week is rather light with trade the highlight, meaning added emphasis will likely be placed upon global goings on as well as any progress made in Washington toward either financial or medical reform.

Some life in the equity markets with the strong gains of last week pushed some of the weekly (and daily) indicators to new highs. Specifically the advance decline line and net advancing volume. While volume has remained very light (ongoing issue), the long string of advancing days has helped push the indicators into a recovery high. However, with every silver lining is a dark cloud, as many of our momentum indicators are now also showing a market that is strained and needs to take a breather (go down a bit) before embarking upon a renewed up trend. The rapid change in the momentum matched that of the initial blast-off in March ’09, however today’s market is nowhere near as decimated as it was a year ago. So, while the markets continued to rise into the summer last year, it may be harder for the markets to repeat that feat this year. So far, all the various asset classes (save for bonds) are in established up trends and have survived hits from Greece, real estate and an economy still losing jobs, so while we have been cautious, the markets continue to rumble higher. Unfortunately little has been done to deal with many of the issues that created 2008 and we may yet see a repeat, however for now – at least this week, it is not in the cards!

Signs of a stronger economy (or still less bad!) from the unemployment data forced bond prices lower and yields higher keeping our bond model in the “sell” camp – meaning keep maturities short. While that also means very low yields, it has been rewarding in that principal has been protected as longer-term interest rates rise. If inflation fears are on the rise, as telegraphed by commodity prices, than why haven’t the inflation-protected notes faired better this year? Set to yield just over 2%, the income adjusts based upon changes in inflation, which so far has actually been rising according to the recent CPI report (after actually falling on a year/year basis as recently as October. Something to keep an eye on.

© 2010 Paul J. Nolte, CFA
Editorial Archive

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 | Managing Director, Dearborn Partners
Chicago, Illinois | (312) 334-7123 Tel | Email | Website