Financial Sense Home l Broadcast l WrapUp l Storm Watch l About Us l Contact Us
|
NOLTE NOTES The petulant markets are just not happy with just any gift, they wanted a half point rate cut from the Fed and sat in the corner and pouted when they didn’t get it. Even the subsequent announcement of joint actions with central banks around the world to stave off a credit crunch mollified investors for a few trading hours (the markets jumped 300 points, subsequently went negative before finishing 50 points higher). Instead of punishing the markets, investors were punished for hanging around thinking the Fed is actually trying to ease the tight credit conditions. A further slap at the Fed occurred with the release of inflation data, showing the inflation rates were running much higher than economists thought and putting into question any additional rate cuts by the Fed. Much of the higher inflation can be traced to energy prices, but more importantly is the widening spread between producer inflation (PPI) and consumer inflation (CPI). The PPI has been running much higher than CPI for well over a year – a condition that we believe will eventually put pressure on corporate margins compounding an already slowing earnings environment that will not be conducive to a strong equity market. Among the many indicators we look at to assist us in determining economic strength include employment, capacity utilization, ISM data as well as reports from the Economic Cycle Research Institute. All of the above items have turned lower and some are at multi-year lows. Non-farm payroll data has been weakening for two years and the current gains are well below those of a year ago. Utilization of factories, reported as higher last week, has been unchanged to lower over the past year, indicating that factory usage is generally declining. The ISM data for both non-manufacturing as well as manufacturing are both slowing making their way toward 50, the magic number that indicates whether the economy is expanding or contracting. Finally, the ECRI weekly data is at its lowest point since 2003. The Fed has cut rates three times, and the markets are not any higher than they were when the cutting began in August – hardly an endorsement of lower rates fixing the economy. Finally, we are also very surprised at the euphoric investor. As reported by Investors Intelligence, the percentage of their survey that are bullish is 53% - save for two weeks above 60 in October, this reading is only a few points from prior peaks that marked short-term peaks in the markets. Rates rose as inflation data was much higher than expected and the Fed cut was less than expected, keeping the inflation “bogeyman” around longer than many would like. Commodity prices, as measured by the CRB index continue to rise and has been up over 15% as compared to year ago levels for thirteen of the last fourteen weeks. Gold stocks are modestly higher over that same period, however the price of the metal is looking much cheaper than trying to buy the gold stocks. We anticipated a rise in rates into the end of the year, however we are still calling for lower yields well into mid-2008, as the Fed will continue to cut rates to attempt a jump-start of a stalled/dying economy.
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 |
