NOLTE NOTES
The Billion-Dollar March
by Paul J. Nolte, CFA
November 17, 2008

The billion-dollar march. As companies file into Washington to get in line for a government handout (cleverly disguised as a bailout!), the markets continue to mark down stocks in advance of the Christmas selling season. The TARP program, passed with the understanding that “toxic” bank debt would be purchased has been scuttled in favor of direct injection of capital into the banking system. Admittedly a better program, but the “on the fly” approach is making the market nervous that the powers that be do not have a mental grasp of the situation. A complicating factor is we are in the dead zone for both Congress and the President, making new policy creation tricky at best. On top of all the good news from the government, the economy continues to look like it is fading – even on life support provided over the last few weeks. The fact of the matter is the reports are going to be bad for the next few months, reflecting the worst of the credit lock-up during the September/October period. Employment is also likely to lag, meaning the unemployment rate will be getting much worse before it gets better. So Santa won’t be making a visit to Wall Street this year, let alone to a nearby mall. Fortunately, in our view, the bleakness in all the above is likely already reflected in seriously discounted stock prices.

Volatility is feasting this Thanksgiving. A Thursday reversal provided the market a 10% from bottom to top rally, once again testing the lower reaches of the recent trading range for the SP500 (around 815). That euphoria barely lasted a couple of hours after the close and selling once again hit stocks Friday. While we are warming up to stocks, given their reasonable valuation, it may be a fully year before stocks once again begin to reflect a better economic outlook that is on the horizon (granted, on the FAR horizon). Our models continue to show that the markets should return mid-teen annual returns over the next 3 to as many as 7 years from current levels, but unfortunately it is quiet on the question of “is the bottom in?” Even if the markets break the trading lows, we will be once again nibbling at stocks, as the subsequent returns would approach those realized during the flying ‘90s of 20% annually. We are not quickly spending the last nickel, but slowly adding to existing positions over the next year.

For the first time in five weeks, the bond model has registered a “buy” signal, indicating interest rates are heading lower. We are not jumping on this signal just yet, as it has paid to wait a week or two to get confirming signals, but the fact that interest rates could be heading lower should help the already anemic economy. The global conference meeting in Washington over the weekend did little to further open the credit markets, however improvements have been made over the past couple of weeks. In general the countries agreed to increase oversight on rating agencies and hedge funds, however little in detail was provided. We are heartened with the coordinated efforts of the global governments and banks to increase liquidity and lower rates to provide grease to a “stuck” system. Their efforts are beginning to show results, but it will take a longer time to fully realize all the fruits of the recent actions.

© 2008 Paul J. Nolte, CFA
Editorial Archive

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
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