Job, jobs and more jobs – really, this is not an April fool’s joke. Far surpassing what anyone expected, the economy not only added jobs in March, but also the prior two months were also revised higher. As with any economic report, there is something for everyone, the bulls have been waiting for job growth, and they now have it in spades. Those bearish on the economy see hours worked and pay meager at best and incomes not really keeping up with whatever inflation number is available. Complaints were also registered among those hoping for a rebound in manufacturing jobs. All the gains were in the very large service sector. For those looking at a manufacturing comeback, a check at the local auto dealer may be in order. Consumers are interested in the best deal and are willing to buy “just as good” but much cheaper, as well as wait for rebates. If the auto companies have to cut expenses to meet the demands of consumers for better quality at lower prices, and the unions have no desire to see their rank and file wages cut, what happens but a slow, steady movement of jobs to cheaper countries. It has been happening in manufacturing for years, and is beginning in the service sector. Few consumers are willing to “pay up” just to have it made in the US vs. buying on sale or same quality cheaper price. It will be different jobs, with much different skill sets that our children will have to be successful. Lack of manufacturing does not mean lack of success.

The very strong rally on Friday was concentrated in the very oversold OTC market. Technology stocks took the lead and have not looked back. While we had been expected a rally, we have been surprised at the strength of the technology area. While still not out of the woods, it bears watching this market as a potential leader, if indeed the correction is done and the next leg up in the bull market is ahead. If, however, the rally is but the end of the beginning of the correction (just follow along!) – there will be much more pain ahead. The strength of the markets this week has moved the short-term indicators to “no man’s land” – the coin tossing middle ground. We expect that the momentum build on Friday will carry forward at a muted pace, as investors will be heading out for the three day weekend. Not sharing the good news in the OTC market were the NYSE stocks. While many more stocks were up than down on Friday in the OTC market, a mere handful were more positive than negative on the NYSE. Volume was much stronger as well in the tech heavy OTC as compared to the NYSE, a potential harbinger of a more speculative environment that usually does not end well. We will keep an eye on the technology indicators for some guide as to new leg up or last gasp in the equity markets.

Friday’s bond debacle pushed rates higher, as investors – once complacent – are now worried the Fed will raise rates as early as August. The original thinking was no increase until November or even ’05. Amazing what one number (308,000 new jobs) can do to groupthink. The bond model has moved negative with the backup in rates. With only 2 of the 5 indicators positive, the model is now projecting higher rates ahead. While we like to get a few weeks under our belt before making change, the tone of the bond market has certainly turned down.

The strength in technology names pushed the sector higher, some a lot higher. However, looking at the technical condition of many of the underlying stocks many still fall into the short-term bounce category with little follow through. For example, looking at Intel (INTC), the largest semiconductor stock. Save for Friday’s action, much of the rally back toward 30 occurred on relatively light volume, not an indicator of real buying interest. In order to turn the chart pattern positive, INTC needs to get above 29, which marks prior peaks as well as bottoms in the stock going back over 6 six months. Finally, various moving averages (both the 50 and 200 day) both are sitting at 29. Again, from a technical perspective only, 29 for INTC represents a likely ceiling for the stock, or if broken through, a floor in the future. Formerly strong groups took it on the chin, as investors rotated back to the technology sector, including oil related issues (as crude prices fell on the week) and consumer related names. The picture here is reversed from INTC’s, support exists below current prices and the decline has occurred on lower volume, indicating investors are not selling their positions as heavily. For example, one stock we have in portfolios, Corn Products (CPO) had been trading in a band between $36 and $40 for the last month, broke above that band late last week on higher volume, indicating buying interest. The same is true in the oil patch. Both Chevron (CVX) and Exxon (XOM) remain in a trading range where declines have been occurring on lower volume, increases on higher volume. The tale will be told once they break that range (hopefully on higher volume) and either point to higher (or lower) oil prices ahead. Considering the huge decline in crude prices and the small drop in the stocks, were betting on higher prices for the stocks ahead.

The better than expected jobs data provided the fuel for the market to rise, with much of the buying concentrated in technology stocks. During the first quarter, and we anticipate the remainder of the year, value stocks and small stocks outperformed the growth issues. We will continue to concentrate on these areas of the market as well as the international equities, as many countries remain, on a relative basis, cheaper than our own. We have not yet changed our fixed income positions, however additional weakness in bonds will force us to shorten our maturities as rates move higher.

© 2004 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.

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