Market analysts are sounding like Gomer Pyle upon the release of the employment report – surprise, surprise, surprise! Not only did the headline job loss come in worse than expected, but also the revisions to past months shaved enough from the initial estimates to put the first three months of the year into negative territory. Investor's will need to get used to being disappointed, as a recessionary environment tends to bring out the worst in economic data. Dead ahead is first quarter earnings, with Alcoa stepping off first. Already earnings have declined by more than 10% from the peak last year and expectations are actually high (if excluding the financial sector) for a decent earnings season. While the large multi-national firms should do just fine (as exports are doing very well), we don't believe the current economic environment supports a generally strong earnings season.

The economic calendar is a bit light next week, however the strength of the export market will be watched closely with the trade figures on Thursday. Consumer related reports that bear watching will be the increase in consumer credit (outside mortgages) especially the amount in revolving credit (which has been up for two years) and consumer confidence due on Friday. Here's hoping for no surprises.

The markets raced higher expecting much of the financial sturm und drang is in the rear view mirror, with the successful raising of capital by Lehman Brothers and the likely buyout of National City Bank. Even the admission by Fed Chief Ben Bernanke in front of Congress that the economy was worse than originally thought did little to move the markets. However, with all the good news, the underpinnings of the markets had little movement. Volume continues to be a concern, as it fell after Tuesday's big jump. Even Tuesday's volume was well below that of mid-March when the market moves were just as large.

One other test we use is a break of prior peaks in our indicators as a sign that the characteristics of the markets have changed – so far no such luck. While we have not broken to new lows, the old highs remain firmly in place – and until those are significantly broken, we are comfortable calling for a continued trading range. In fact, the SP500 can rise to roughly 1450 (from the current 1370 and still be within the context of an overall decline. Unless there is a change in the complexion of the market over the next few weeks, we may be taking additional equity positions off the table in favor of cash or bonds in anticipation of another leg down in the markets in the months ahead.

While the stock market surprised many by actually rising a bit on Friday – in the face of a poor employment report. The bond market had their best day of the week, as rates fell and the anticipation that the Fed would cut rates further at their next meeting at the end of the month. The bond model confirms that belief, as it remains in positive territory as it has for the past five weeks. Over that time, rates on the long bond have declined by a quarter of a percent, while short rates have declined by a half percent. Bonds have also been a better investment than most of the equity markets as well, with the possible exception of commodities. Until that relationship begins to change, we will continue to favor bonds over stocks in investment accounts.

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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