Another Roller Coaster Week for the Financial Markets

By: Paul_J_Nolte

Congress was busy last week – and fortunately not in our back pockets. Between the baseball steroid issues and interviewing/questioning both the Federal Reserve chairman and Treasury Secretary, you'd think they were really looking out for the country's best interest. Congress is in an uproar over whether Roger Clemens (or his wife) did or did not take steroids and who is lying or just mis-remembering. The collective brainpower that was brought to bear on this important national issue was something to behold. From there they interviewed the Fed Chair and Treasury Secretary – and evidently they believe the economy is a bit worse than originally thought, but by yearend should be back on track.

Again, the outrage from Congress came from being told everything was going to be just fine, only to find out that today, things aren't what they were supposed to be. Looking for the quick fix (instead of a solid long-term plan), Congress and the President passed/signed the rebate plan that should, by May, put a few hundred dollars in your pocket. Instead of using the “windfall” to pay down some of the burdensome debt, they are recommending that it be spent. The last bit of sage advice from our leaders came from former Fed Chief Greenspan, when he recommended everyone take out adjustable rate mortgages. Leaders indeed!

Another roller coaster week – complete with swoops and daring curves – only to wind up essentially unchanged for the week. We have been looking at the notion that a bottom is being put in place, however the evidence is still weak at best. While the “oversold” condition has generally be cleared, volume has not picked up much on the rallies, nor has any significant prior peak been cleared that may indicate a strong interest in buying stocks. Blame (‘cause there is always someone to blame) is put squarely on the media for talking down the markets and economy.

However, when looking at the markets, the most rudimentary of analysis tools – a simple trend line – will tell you that the trend of the market is lower. Over the past 25 days there has been a moderation in the selling volume, as they have, at least on the NYSE, been equal over the past five weeks. Shorter term, volume continues to pile up on the sell side and the net number of advancing stocks during the trading days remains modest even during the largest advances. Even this week, there were more stocks declining than advancing on both the NYSE and OTC, even though the averages rose. The markets are modestly better (compared to January), but remain a treacherous place to be. 

The rapid decline in rates over the past six months is likely, for a while, at an end. For the second week running, our bond model is pointing to higher interest rates ahead. How can that be, if the Fed has indicated additional rate cuts would be coming? The model we use follows the trends in five markets that have an impact upon interest rates from short to long-term interest rates, commodities and corporate bond prices.

The trend in long-term rates has gone sideways since November, although short-term rates have fallen. The yield curve has steepened to a more normal spread of 2+ percentage points. Like stocks, the trend in rates is taking a breather. For now, we will heed our model and buy short maturities. 

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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