NOLTE NOTES
Let's Go Shopping!
by Paul J. Nolte, CFA
December 3, 2007

The last three weeks really just didn’t count as far as the markets were concerned. Never mind the multiple 200+ down days for the Dow, the multiple 200+ up days or the many “key” 9 to 1 volume days on both up and down days, as the markets are right where they were on November 7^th, before all the bad (and good) stuff happened. The housing and sub-prime issues continue to pervade trader’s thoughts and actions and until an infusion of cash to Citigroup, investors felt we were on the cusp of a financial meltdown. Comments from Fed officials in advance of their meeting on the 11^th also indicated they stood at the ready to cut rates further to avoid further erosion in the economy. While we will always applaud lower interest rates, investors seem to feel that the lower rate environment means the markets should immediately rally. However, the benefits of lower rates are unlikely to begin showing up in the economic data until very late in 2008. We still see the risks of a recession rising and one key will be the consumer and how they spend over the next four weeks – so far they are spending less and focusing only on the deeply discounted items. So go do something good for the economy – shop!

After falling much of November and unable to mount even a back to back rally, the markets put on a show this week, erasing much of the losses for the month. On a daily closing basis, the SP500 made it down to the August closing lows in what is being called a successful “retest” of those lows. While we will allow for some Christmas cheer in the financial markets over the next few weeks, the picture still point to lower prices ahead. The momentum of the markets has changed from fairly strong early in 2007 to weak where there is more volume on bad days vs. good days. Investor sentiment remains on the bullish side, which is surprising given the increased volatility in the markets (especially to the downside) over the past two months. Valuation concerns remain high, as the market price to earnings remains well above the long-term averages – again an indication that investors are willing to pay ever-higher prices for stocks where earnings are beginning to slow or even decline. Earnings on the SP500 are roughly equal to a year ago and have declined by 7.5% from the August peaks – not a recipe for a bull market.

The bond market continues to take all the bullish news in stride. From a slowing economy to a Fed ready to cut rates again to a volatile stock market, bond investors have pushed rates lower by 85 basis points since mid-June on the 30 year bond and 175 basis points since the opening days of 2007 on 3 month Treasuries. The resulting steepening of the yield curve to a full percentage point is an attempt to get the banking system healthy. Banks struggle to make money when interest rates are the same on both short and long term rates. When the curve gets above 200 basis points steep, we will begin to review the banks again for purchase, until then it is a good time to get your shopping list together.

© 2007 Paul J. Nolte, CFA
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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