U.S. Dollar Jump and Gold Price Decline

By: Paul_J_Nolte

On the anniversary of the “date that will live in infamy”, many are looking around and wondering whether the US has past our best days and is now slowly sliding into a sunset. Buoyed by a much better than expected jobs report, investors initially cheered and then rethought their buying as the markets finished slightly higher on the day. The key to the day was the huge jump in the dollar/decline in gold. The big question is can the dollar find new strength or is it just a one-day wonder? The job report continued the slow improvement of the recent past, however the near zero loss was not corroborated by other economic reports over the past month.

The service portion of the economy (now the largest) showed renewed contraction in November, while same store sales remained subdued. The coming week we’ll get to see how much consumer credit was created (expect another decline) and overall retail sales will likely show a modest increase. Thankfully, Congress is working on fixing the college bowl championship series, not likely to make it better, but they don’t have anything better to do during December!!

The markets acted much better after getting stuffed during Thanksgiving week and declining after the Dubai “issue”. Bolstered by the repayment of TARP money by BankAmerica and the employment situation, investors generally were in a buying mood. The market is once again back at the top end of a trading range that has corralled the SP500 since September. Many of our market internals indicate a narrowing of stocks that are pushing the averages higher, but higher they go on the huge government bank stimulus program from late in ’08. Volume figures, at least for the week were decidedly bullish, as volume rose, especially when the markets advanced.

Since the markets historically rise between Thanksgiving and New Year’s, it is little wonder stocks are rising. While much of the gains from the unemployment report were erased by noon, stocks have struggled to push outside of the range even with good economic data. Stocks could still decline to roughly 1060 without breaking the current advance. Betting upon strong seasonal tendencies, stocks should rise modestly during December. However, poor consumer related data, from loan growth to retail sales (and/or Christmas sales) could temporarily derail the gains. Money managers are willing to cruise into the New Year without rocking the boat.

10-year yields have made a round trip between 4.4% and 4.25% in the past month. Fears of a stronger than expected economy are now increasing the probability of a Fed rate hike in the first half of the year to over 50% (from near zero two weeks ago). The rise in yields has also had a positive effect on the dollar, as higher rates attract foreign capital, increasing the demand for dollars.

The model remains modestly higher, however if short-term rates rise much from their near zero levels, the model will move to “sell” meaning investors should focus on short-term bonds only. The key for both interest rates and equity prices is the real strength of the economy, which is still hotly debated. Hopefully the data this week improves everyone’s economic vision.

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

Copyright © 2009 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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