In what can only be described as an exciting quarter for nearly everything but investing. From London bombings, to hurricanes to a new Supreme Court Justice, the financial markets seems to roll with the punches and actually come out ahead for the quarter. While notching the first positive September in seven years, investors have been heartened by the ability of the stock market to brush off all the negative news around. The economic news last week was not necessarily terrific, with home sales declining nearly 10%, median home prices roughly flat over the past year, we may finally be seeing the beginning of the end of the housing boom. Confidence continues to flag and more importantly the views of the future are relatively bleak, with jobs hard to find higher and inflation expectations also higher. Maybe the nearly $3/gal prices at the pump are also taking a toll on the pocketbook. Interest rates have been inching higher, following crude prices and with economic numbers clouded by the hurricanes, the earnings releases slated for this month may become more important as investors should get a “ground level” view of the economy from Corporate America. Our views of the quarter ahead have changed little from quarters past, a higher interest rate environment, still high valuations and a historically weak fourth quarter for a first presidential term leave us with quarter that should hug the flat line.

As mentioned above, the economic releases were on the poor side, however investors discounted many of them, instead focusing on the government aid that is likely to be voted for the region. Some have called this Bush’s “New Deal”, the amount of money that is being talked about has the interest rate markets spooked and pushed rates higher. Inflation at the gas pumps continues to be an issue, however we still see discounting at the retail stores. Corporations were to be the savior this year as the consumer was going to finally end their reign of being the big spenders. However, cash levels are building, merger activity has increased (along with dividends and stock buybacks), what is becoming evident is corporations are struggling to find good returning investments to make in their business lines, so they are sitting and patiently waiting. If the markets are to embark upon another fourth quarter rally, indicators to watch will be how quickly sentiment bounces back and if real estate stabilizes. On the flip side, investors have piled money into funds betting on a market decline, so the tug of war continues between a positive and negative market outlook, and hence our view for more lousy returns in the coming quarter.

With the Fed hike last week, and worries over the costs of rebuilding the Gulf Coast was enough to “do in” short-term bonds and force the bond model to a “sell” (or shorten duration). However, with so many indicators so near positive or negative territory, we will wait a bit before jumping out of longer bonds, which actually faired well last week. The curve has once again begun to flatten as investors realize the Fed is not going to change their tune anytime soon. We are looking for a further flattening of the curve (short rates higher, long rates stable/falling) over the remainder of the year.

© 2005 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
Director Investments
Hinsdale Associates
630-325-7100
Email