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NOLTE NOTES What one-week gave - the next week took away. After surprising weakness in the Institute for Supply Management (ISM) data on non-manufacturing (the bulk of the economy these days), the markets sold off and never really regained their footing on the week. Also pointing to weakness in the consumer area were retailers announcing their sales (generally weak). Finally, consumer debt continues to build and more importantly, it is being built by credit cards. Revolving debt has been growing for the past two years, after falling from ’98 to ’06. Last week’s data pointed up the major differences between the consumer and the still healthy businesses. Overall earnings growth – outside of the financial sector, has been in double-digit territory, thanks in large part to the still booming export market (we’ll get an update on Thursday). However, the consumer is beginning to grasp at whatever is available, whether using credit cards or cutting back on their spending, to stay within budget. The fact that payroll growth has slowed may also add to the consumer’s angst. Sentiment remains fairly low and expectations about the future also remain dour. We believe we are in a recession that likely started either late ’07 or early ’08 – and given that an average recession lasts ten months, we could be in a funk for much of the year. The short-term rally that broke the early year selling last week quickly gave way to renewed selling this week. Revisiting the January lows, the market is on the precipice – it could turn higher, putting in at least a short-term bottom or fall through the recently established bottom to push to new lows. The market internals for the past couple of weeks have improved some, indicating that just maybe the bears are getting tired of selling. It would be healthy to see a bit of persistent buying that is built upon improving volume for more than a week or two. Other “positive” items that may point to exhaustion include the number of new yearly lows has shrunk from over 1000 to less than 100, more volume on up days vs. down days and some recovery in the worst performing sectors of the markets. While this doesn’t mean we are by any means out of the woods, it at least sets up the markets for some temporary relief from the persistent selling that has marked this market since December. A couple of key points to look for on the SP500 – a close below 1315 opens the door to “officially” retest the lows at 1270. A rally through 1400 could allow the markets to continue toward 1450 – all within the context of a still “bear” market. A poor reception for the 30-year bond last week pushed yields on the longer dated maturities back up, while the short-term maturities continued to be bought. This has pushed the spread between short and long-term maturities to over two full percentage points – a spread that we haven’t seen in three years (when the Fed was pushing rates up). The combination of widening spreads and still higher commodity prices has moved our bond model to “sell” territory for the second time this year (the last three signals lasted only one week). While we are getting cautious about how much lower rates can go from here, it may be too early to begin talking about higher interest rates – that may have to wait until summer.
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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