Global Economic Slow Down

By: Paul_J_Nolte

Amid signs of economic slowing, the oil decline continues to garner the headlines. Not only is the US economy in a funk, but also Europe is beginning to show signs of slowing, as is Hong Kong – all the more reason to sell energy, as less will be needed in a global economy producing less.

Housing will be near the front this week, as housing starts will be released Thursday – on top of news that foreclosure rates were up 50% vs. year ago levels and prices continue to contract across the country. We have been asked what will get the economy moving again and more importantly – when? While the focus over the past couple of weeks has been on lower energy prices, which are dropping as a result of slowing economic growth (and reduction in speculative fervor), the key surrounds housing and the lending markets.

Anytime news hits the wires about another write-down of assets or a call for additional equity to bolster balance sheets, the markets react poorly and decline. However, when the news in “only” economic data or corporate earnings (lately combined with lower oil), the markets have rallied. As of yet, we are not seeing banks loosening their purse strings – and until they do so, economic growth will continue to be modest at best and for an extended period of time.

We have highlighted volume as an “issue” for our reluctance to jump on this rally. This past week was among the slowest of the year – either indicating a lack of interest or the last of the summer vacations for investors. Another problem with the rally is that there have been relatively few participating stocks. Over the past five week rally no week has seen over 1000 net gaining stocks and the total gaining issues of the past five weeks is merely 10% more than the one week loss at the beginning of July. So robust this rally is not. A potential stopping point of this rally is that it has hit the 50% mark – recovering half of the losses from the June/July decline – that has stopped prior rallies and would continue the stair-step decline that has marked this market since last October. A possible scenario: stocks begin to resume their decline over the next two weeks as energy rallies and the dollar declines. The lack of conviction in both the economy and markets will make “scaring” investors away from stocks that much easier.

For all the excitement over higher inflation, the bond market continued to rally, moving yields on the 30-year bond to their lowest levels in four months. Obviously, inflation is sooo yesterday's news! With lower energy prices and still weak economic data, perceptions may begin to grow that the Fed will have room to actually cut rates again to help spur economic growth. While those discussions have yet to occur among Fed members, it could get life once past the elections.

Our bond model has registered its third consecutive positive reading, indicating rates should continue to trend lower in the weeks ahead. One highlight of the bond curve has been the recent move toward flattening, where short and long-term rates are very close. Normally, to rectify past sins, the curve gets to 3-4 percentage points “steep” and stays for a year or two. This time, we managed only a few weeks over 3 percentage points – as a result, little healing in the financial sector is expected.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2008 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - 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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