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NOLTE NOTES It was Christmas in June for the financial markets, as they got everything they wanted from the economic reports last week. The consensus view after the reports was that the economic slowdown of the first quarter was merely a blip in the overall scheme, and the economic engine has once again sputtered to life and is running well. Judging by the income and spending report, it is very clear that the consumer is not yet done making purchases – however it is unclear how much of the spending is going toward the high and rising energy products. The employment report was a bit better than expected, however some are quibbling about the “birth/death” rates that are a part of the calculation. Without getting too technical, it doesn’t refer to employees being born or dying, rather businesses going out or coming into existence. The estimates are best guesses by the government and are generally revised well after the initial release. No matter, the trend of employment gains has been falling for the past year and we believe will continue to be poor the remainder of the year. Finally, the manufacturing sector showed some resilience as the ISM report pointed to better times from manufacturers. This week will not have the market moving numbers of last week – so we expect the markets to trade off of merger activity as well as some residual effects of the favorable data from last week – the bull market continues! Even though the markets have been moving higher, the internal “health” of the markets were poor, with more stocks declining than rising (even on up days) and heavier volume on those down days. Last week changed the characteristics a bit, but many of our indicators remain in the dangerous range for the short-term and declining to flat for the longer-term. The number of new highs expanded fairly dramatically last week – although still below prior peaks earlier in the year. We mentioned China last week as one of the keys to our markets – and their increasing the tax on transactions was yet another indication that they were attempting to slow both the speculation and economic activity – with little to show for their efforts. While we believe the economy is slowly deteriorating, the decline in stocks won’t come from a sudden realization that we are in or near a recession. That tipping point is likely to come from outside our borders – either from rate hikes in the European community, Japan or China – or a more radical announcement from China with respect to their economy or financial markets. Keeping your eyes on the US markets may mean you miss the more important “big picture” from around the world. China may be playing a role in the Treasury markets as well, as indications are that their purchases are focused on the short-term maturities, forcing those rates lower and taking away the money flow into longer-term bonds – keeping those rates higher. Our model remains stuck at a “1” reading – pointing to still higher rates in the future. Interest rates have been moving steadily higher for since early March, tacking on nearly one-half percentage point to yields. Once rates cross and stay above 5%, we believe stocks could run into some trouble and, more importantly for income investors, likely put an end to the 25 year bull run for bonds – meaning rates are likely to begin trending higher in the years ahead.
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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