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NOLTE NOTES First it was if, then it became when and now it is how much. The very weak jobs report on Friday moved the Fed to front and center in the debate on economic growth and how aggressive should the Fed be in cutting interest rates to save a faltering economy. While a negative reading on “job creation” does not necessarily mean we are entering a recession, the likelihood of one has increased. However, other economic reports last week were not as dire, as the consumer seemed content to spend, judging by the retail sales figures provided by the various retail companies. The now usual poor comment from the real estate market were also made last week and guesses as to when the mess may abate range from later this year to sometime in 2010. The surprisingly poor jobs report puts added emphasis on the reports this week, including trade (are foreign economies still strong enough for us to sell to?), business inventories and production (has our economy slowed to force stockpiles of “stuff”?) and the governments reading of retail sales. In one week, one economic report created an immediate sense of economic urgency that didn’t exist seven days ago. We now look for confirmation from other reports before we really worry. Vacations are supposed to be over and traders are supposed to be trading and volume is supposed to expand back to what passes for normal. However even with Friday’s big decline, volume continues at a very slow pace. Certainly the market “internals” (number of rising/falling stocks amount of volume going into each etc) were poor and indicate that the market may be embarking upon its much-anticipated retest of the lows made August 16th. The weekly data supports additional market weakness ahead and just maybe both the longer and short-term data will coincide with a neat market bottom sometime later this month or October – when the markets are supposed to bottom. The possibility still exists, however, that the markets “fail” the test and continue to drop. That will be confirmation that a new bear market cycle is upon us and we could easily see a 10-15% drop from the prior lows before it would be OK to step back into the market. This scenario would line up with a recession that would be occurring is mid-2008 and ahead of the beneficial effects of the rate cuts the Fed will likely be making to re-energize the economy. Persistent weakness in the utility averages and strength in the commodity complex has kept the bond model from registering a positive reading over the past couple of weeks. Yields have moved lower across the curve, as investors begin betting on multiple interest rate cuts by the Fed to keep the economy on decent footing. After hitting 5.25% on the fourth of July, the long-bond has rallied in price to cut the yields to 4.7% on Friday. Over the past six weeks short-term rates have declined by one-half percent as well, keeping the overall yield curve relatively flat. Based upon the employment figures last week, investors are figuring on either a pre-emptive rate cut or a 50 basis point cut at their September meeting. We are figuring on the usual 25 basis point cut, as only once in the Fed’s history (2001) have they started a rate cutting cycle with anything more than a quarter point cut.
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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