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NOLTE NOTES Thankfully it was a short week – as the markets moved better than 200 points in three of the four trading days and Monday took a Herculean effort to put in a modest gain. Investors have decided that the worst is now over with the buyout of Bear Stearns (effectively avoiding bankruptcy) and investors can once again buy stocks – especially financials. The Fed cut rates again, now at 2.25% for Fed Funds and bond yields fell again to their lowest levels since the ’02-’03 bottom. Earnings from the remaining “major” financials last week indicated some modest issues, but nothing that caused investors to cringe. While the markets may get a respite in the next week or two, the economy is still faltering and is likely to continue to do so until early summer. The economic reports that are coming out today won’t be affected by the rate cuts made over the past couple of months. However, those that will be reported during the summer will begin to reflect the initial cuts done last August. So don’t expect a major shift in the tenor of the reports for a few more months. The one we will watch closely will be consumer spending and income as an indicator of the health of the consumer – are they retrenching or continuing to spend in the face of higher energy and food prices? The days are getting longer, but as we know – it can still snow! The volatility of the week and higher volume of option expiration Thursday did little to move the indicators in either direction. As a result, we continue to expect a rally in the generally down trending markets. We highlighted a few of our indicators over the last few weeks that are showing some promise in pointing to a rally, however for the markets to actually turn positive, we would like to see a close above 1350 and then above 1400. This would give the markets a higher close than the prior minor peaks of late January and late February. If we are in a true bear market, we would also expect the returns over a two year period to be negative, as they were in ’00-’03 and during the ‘73-‘82 period. Today, the two-year return on the SP500 is merely 2.7% (excluding dividends). One other factor we consider is investor sentiment which has been getting pretty pessimistic Investors Intelligence reports that only 31% of investors are bullish – a far cry from the over 55% at the end of the year. We would prefer that the sentiment indicators stay in this range for more than a week or two, the fact that they are this low should provide enough firepower to create a buying stampede (like the two 400+ gains of the past two weeks). Our bond model remains in positive territory, however with the 30-year bond now at historic lows, how much more is there left to go? What has become a purchase of necessity (nothing else is as secure), has pushed rates down. The yield curve (difference between short and long rates) is now above 3%, which has been reached twice in the past 20 years and in each instance, the length of time above that spread was significant. Ending in late ’04 after 153 weeks and 97 weeks in mid ’93, these wide spreads allow banks to repair their very poor balance sheets. It also begins to force investors to buy long-term bonds to get some yield at precisely the wrong point in the investment cycle. As crazy as it sounds, buying bonds with less than 10 years to maturity makes the most sense in today’s environment.
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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