NOLTE NOTES - Investment Models Continue to Point to Emerging Markets and Commodities

By: Paul_J_Nolte

Be careful what you wish for – you just might get it. Such is the dilemma of the markets this weekend. The Fed did as expected by cutting rates by a quarter percent, the markets rallied off the news and then thought better of the idea and declined by the third largest amount this year the very next day and only a late session rally on Friday avoided a complete weekly rout. A few nagging issues continue to dog the markets, from the subprime issue (costing the Merrill chief his job and likely the Citigroup CEO) to persistently higher oil prices – soon to touch $100/bbl.

Although the job outlook improved more than expected with Friday's release of the non-farm payroll, given the huge revisions that have dogged this release, few actually believe the numbers. Is it any wonder that consumer confidence has been declining of late – along with supply management's report on manufacturing, now registering only the fourth reading below 51 (50 is the “magic” growth number – above good, below poor) since June of 2003. While this week won't have the big economic reports, keep an eye on both gold and Texas tea.

Our investment models continue to point to overseas and emerging markets as well as commodities for yet another month. While these have been very volatile markets, especially as ours turned lower in July, they have been rewarding over the long term. We are most concerned, however, with a prolonged decline in the US markets that could force international markets lower. For us to get very bearish on the equity markets, we must see better returns from the bond markets vs. the equity markets. As of yet, bonds have not surpassed equities in our modeling process. That does not mean that equities are bullet proof, just that – so far – equities are the better investment.

The stock market does look sick, with a series of lower highs from the net advance-decline line as well as the net volume of the “a-d” line. Further weakness has been shown in the volume figures, with the market continuing lower on higher volume than on advancing days. In fact, the cumulative figures are back down to the levels of June last year, as the current rally began. This wide divergence between the averages and the rest of the markets are generally resolved in favor of the general markets – meaning a stock slump is in the offing.

Bonds continue to be the safe haven investment, as sub-prime continues to entangle more of the economy and companies earnings. The fact that bonds are rallying at all, in the face of rising oil and gold prices is a testament to their status as the place to go when all else is crumbling. Our bond model remains in positive territory with a “4” reading. The yield curve continues to once again flatten, as short rates increased while long-term rates declined. The long bond yields have declined to levels not reached since yearend '06 as well as '05. There may not be too much juice left in the 30 year bonds, however with our model still pointing to lower rates and a Fed likely to provide them, still lower rates could be in the offing.

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

Copyright © 2007 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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