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NOLTE NOTES The Fed surprised many in the markets and cut rates half of one percent (50bp) and the equity markets cheered to the tune of 400 Dow points. Either the Fed is VERY interested in heading off recession or there is more bad news ahead that they would like to be able to cut off before it built too difficult to overcome. The inflation news was certainly good – enough to provide the additional cover for the Fed to cut by 50bp. The housing numbers reported last week were certainly very poor and combined with a few corporate reports (FedEx and Circuit City) indicating that the consumer remains in the struggling mode. This week should provide some additional color on housing, as existing home sales are reported – expected to be 5% lower than last month. Friday bring the consumer reports on income and spending, which have been interesting to watch over the past few months, as spending has been trailing income, indicating the consumer is very slowly trying to rebuild their personal balance sheets (saving more/spending less). This week’s activities may still carry the “halo effect” from the Fed cut, however the focus will begin to turn to the following week’s employment report – the likely key to the big cut last week. The equity markets loved the 50bp cut and rallied over 300 points from the press release following the announcement. Improving too were volume numbers and the general advance/decline figures also improved significantly. We will be watching activity this week to help determine whether the increasing volume figures from last week will provide lasting – enough for us to commit additional dollars to the equity market, expecting another 5%+ through the end of the year. On a weekly closing basis, the SP500 has remained well within a channel that connects the market bottom of 2003 to the March ’06 bottom as well as the 2003 and 2007 peaks. As usual, we remain overall cautious, as valuation levels are higher than what we would normally see at this point of the business cycle. That said, the action this past week may be enough to get us encouraged that we could be seeing the yearend rally beginning a couple of months early – and we’ll worry about a poor Christmas season in November. For now, we will watch and look for confirmation of higher prices ahead. The surprise of last week has returned to a more “normal” position this week, as the model flipped to a negative reading. Even with the cut by the Fed of their interest rates, short-term rates moved higher, as did long-term rates. On top of the bond market suffering last week, the commodities generally went on a tear. Gold stocks jumped by more than 8.5%, commodity indexes rose by better than 3% - a stark contrast to the rate cut from the Fed. Investors likely believe one of two things: first, the global economy continues to grow at a much better pace than the US – and needs raw materials to keep going. Second, the cut by the Fed will allow inflation to pick up and the dollar loses some support (keys to higher gold). We believe we are still feeling the effects of the 17 rate increases (that ended June ’06) and won’t feel the benefits from the rate cuts until well into the summer of 2008.
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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