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NOLTE NOTES It is not often Peggy Lee and Wall Street meet, however the market action of the past six weeks begs the question posed by Ms. Lee – Is that all there is? If that is all there is my friends, then let’s keep dancing! And stocks did just that, dancing higher as the concerns over housing, sub-prime loans and a liquidity crunch became mere memories. The SP500 is merely a percent away from the closing level of June and three from the May peak. Last week’s economic numbers, especially those on Friday gave the bulls much to cheer, as new home sales rose unexpectedly and durable goods also jumped – an indication that just maybe the economy remains on sounder footing than many believe and the fallout from sub-prime lending is (or can be) relatively contained. What did disappear last week was the thought that the Fed was going to have to cut rates at their September meeting, although a rate cut still seems likely by yearend. While the Fed mulls a rate cut, Japan temporarily sidestepped a hike and the European Central Bank is leaning toward a hike indicating that the global economy remains relatively strong and that the problems in the US have not yet hit the radar screen overseas. Will the third attempt and breaking through 1500 hold this time? If so, “let’s break out the booze and have a ball if that is all there is”! The chugging higher of the markets last week looked like a marathon runner nearing the finish line – laboring and not as fresh as at the start (2002) of the race. The sore thumb that stuck out in last weeks trading was the lack of volume, with the average volume for the week approaching holiday type trading. For the technical geeks, it is hard to put much credence into an advance where participants are sitting on the sidelines. Volume was certainly huge during the decline, however the advance is now running at a small fraction of the sell-off volume – an indication that investors a quick to sell and reticent to buy. The long-term indicators we follow have not yet approached anything close to prior market bottoms, although some of the short-term indicators have, indicating to us at least a rally was in the offing from the lows. Whether the rally can continue may be determined by the economic data following the Labor Day holiday when all the trading desks will be back to full staff. The employment report will be watched closely, however it may be handicapped a bit as many of the announced layoffs in the mortgage sector are not likely to be reflected in the data. Our bond model now has all five indicators showing green, indicating lower rates ahead. Short rates fell below 3% as the Fed has worked to flood the markets with liquidity to avoid the seizing up of the credit markets. Long rates declined slightly as investors begin to price in a rate cut later this year. The sharp decline in short vs. long rates has created a steep yield curve that hasn’t been seen in two and a half years (as the curve was flattening). We believe the situation today is temporary, forced by the sub-prime fallout. Commodity prices actually rose last week, however remain slightly below their recent highs an indication that demand remains relatively high around the world for basic materials – hence the reason for other central banks interest in raising rates to cool their economic growth.
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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