Like a teenage kid during the summer months, the market has had a bit of a growth spurt over the past month the economic figures that have been released over the past couple of weeks have shown an economy that is getting another wind. Retail sales were better than expected – nearly across the board and earlier figures on employment and supply management also showed gains. Although a few companies indicated they would miss earnings estimates, they did little to dent the overall markets liking of where the economy seems to be. This week we will get inflation figures, both on the producer and consumer levels. Due to the Fed’s focus on inflation (that seems to be moderating), these releases will likely take on greater importance than they have in the recent past. Earnings season will be getting into full swing this week as well, with many banks reporting their earnings. What investors will be watching is not what gets reported, but the comments from the companies about economic conditions as well as the impact of the inverted yield curve and housing (if applicable) on their futures.

Many of our technical indicators have deteriorated over the past couple of weeks as the major averages close at multi-year highs, indicating that forces pushing stocks higher are waning. For example, our simple momentum indicators for both the OTC and NYSE have had a series of lower highs – again each push to new highs has been weaker than prior moves. Volume figures still show better volume on declines than advances (the calculation does not take into consideration more advancing days than declining – just average volume of each). While we would like to call for a major pullback in stock prices, so far and correction has been relatively shallow and quick to end, making the call tough to justify over a short period of time. While our long-term models still indicate relatively low returns for the next 3-5 years (in the 5-7% range), the current euphoria over stocks can let the market push higher on a week-to-week basis. The decline in commodity prices has temporarily been halted as economic growth has shown some life. However, whether the short-term rise is merely a correction in a larger declining pattern remains to be seen – it simply is too early to tell. The reaction of the markets to the normal winter conditions this week will be interesting to watch – inventories still remain well above normal.

Our bond model has been negative the last couple of weeks, pointing to higher interest rates ahead. This confirms what we are seeing from the economy as well as keeping us away from becoming too aggressive while rates tack on 25 basis points (so far) from their December lows. From strictly a seasonal factor, the first part of the year is poor for bonds as companies (and the government) flood the market with supply that requires higher rates to get the bonds sold. We anticipate that once past tax day (4/15) the bond market should improve. Furthermore, since we are in the lower rates for the year camp, it is quite possible that the first quarter will be the peak in yields for the year. So much of the maturing paper in portfolios should be held temporarily until rates peak in the next month or two around 5%.

© 2007 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